Several European nations have already been downgraded and if several nations begin defaulting on their debt, the results could be devastating.
That devastation would first plague the European countries, then soon seep its way into our own nation. According to Douglas J. Elliott – fellow at the Brookings Institution – a European recession would have a domino effect and create a similarly dismal situation right here in the U.S.
These four crucial American sectors would be greatly (and quite negatively) affected in the aftermath of defaulting nations in the euro zone:
Business and consumer confidence: Good luck finding any business owner, employee or consumer who isn't already frightened about what's lurking ahead. If the worst-case-scenario does occur, our economy would surely experience even worst consumer spending cuts and job losses.
There's still hope; not much, but some. CNNMoney reported that there is a 25% chance of that worst-case scenario coming to fruition. That process would bring about a series of defaults in nations including Portugal, Greece, Ireland, Italy, and Spain.
Trade: If Europe falls into any deeper of a recession, our $400 billion exports would be slashed badly as well. Until Europe could afford to pay for those U.S imports, America would suffer the loss in sales and, conversely, be forced to cut jobs in related fields.
On a global scale, other countries who rely heavily on exports to Europe would face the same situation – leaving the global trade market in a rather dire position.
Investment: Economic data shows that American firms have more than #1 trillion of direct investment in the European Union. A major hit to Europe's economy would slash through investor profits. Our investments in other countries would also be affected because of the overall domino affect in the global investing community.
Financial flows: Banks and bank subsidiaries have about $2.7 trillion in loans and commitments to governments, corporations, and governments in Europe. An additional $2 trillion “more of exposure to the United Kingdom.”
The progress we've made in dealing with our own financial crisis thus far would be demolished in lieu of further credit losses.
But who knows, they say every cloud has a silver lining. Perhaps Europe's leaders will come together this week and have some good news with improvements on the way to combat the core of the problem. A little imagination, innovation, and level-headed reason-ability can go a long way...
The technical details of the recapitalization will matter as well. If designed badly, the plan could even do harm by encouraging European banks to cut back on lending and to sell existing assets. A serious credit crunch would likely plunge Europe into recession.
Finally, strong-arming investors into "voluntarily" accepting losses of 40% to 60% on their Greek government bonds will certainly add to the risks of contagion if market concerns about other troubled eurozone countries spike again at some point.
Whatever happens this week, the U.S. government would be wise to prepare and encourage the Europeans to take the necessary steps.
Not to mention the International Monetary Fund that could continue assisting a bailout in Europe.
While we certainly aren't happy about spending our tax dollars for Europe's problems, maybe it'll come back to help save us from further economic disaster in the long run.