Flat world runs risk of flatliningU.S. President Barack Obama urged European leaders in June to act aggressively to save Greece from a default crisis because “America’s economic growth depends on a sensible resolution of this issue.”
After the creation of the 27-member EU, now even countries like Greece, Portugal and Spain have the power to shake up the U.S., as well as the entire euro zone and the global economy.
The decision to integrate economies of varying sizes and financial strengths always posed a huge risk to the EU. Fully aware of these risks, the U.K. was skeptical from the start and resisted joining the potentially unstable community.
If economic powerhouses like the U.S. were in good health, the global economy could have muddled along despite the European debt crisis. But the U.S. is hardly faring much better. It saw its sovereign credit rating downgraded due to the astronomical size of its trade deficit, among other concerns. Furthermore, the U.S. unemployment rate remained stubbornly fixed at 9.1 percent last month, triggering alarm bells that the U.S. economy may be heading for a double-dip recession. European stock markets on Monday tumbled up to 5 percent after learning of America’s bleak labor data.
Similarly, the Greek credit crisis threatens other EU members because of the potential for a domino effect of tumbling economies. Its biggest lender, Italy, will feel the first pinch. Jitters are already reflected in plunging Italian government bond prices. And if Italy goes down, it takes Spain, too. Yet, Greece lacks the political competence to battle its fiscal crisis. Even with the global risks its crisis poses, it is deferring austerity measures in fear of an even bigger public backlash.
The battered Greek economy is also taking a toll on European banks and their equity prices. The International Monetary Fund has warned that European banks must shore up capital of 200 billion euros ($281 billion) to stave off the threat of a global recession and credit crisis. Deutsche Bank CEO Josef Ackermann fanned fears by warning that numerous European lenders would collapse if they were forced to bear the losses from sovereign bonds that countries could not repay. Meanwhile, Mario Draghi, the incoming chief of the European Central Bank, called for a “quantum” leap forward to solve problems of economic integration, citing a lack of coordinated fiscal policies as a major problem.
The Greek credit crisis is caused by over spending. As such, politicians here should carefully consider the welfare plans they are trotting out ahead of upcoming elections.