An EU collapse could bring double-dip recession here

The interlocked economies of Europe could collapse in a domino effect if one nation fails — and that nation may not have to be Greece, either.  The Washington Post’s analysis correctly shows a number of weak points, but the end result could be a catastrophic failure which endangers banks and pushes the world back into a global recession:

If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow. …

The most vulnerable European countries — Greece, Spain, Portugal and Ireland — may represent only about 4 percent of world economic activity, but “the debt crisis and its ripple effects are bad news for all corners of the world,” said Cornell University economist Eswar Prasad.

In a way, this reminds me disturbingly of the pre-Great War series of alliances on the Continent.  Supposedly, those existed to demonstrate the folly of war between the great European powers at the time.  Instead, it turned Europe into a powder keg, which exploded when Gavelo Princip supplied the spark.

Prior to the EU consolidation, a failure in Greece may have caused a loss on the international markets, but the problem would have been contained to Greece and the people who invested in its bonds.  Now, with more than two dozen nations participating in the euro, any instability affects the entire EU consortium.  That is one reason why the EU adopted strict debt and spending standards for its member nations — and why people constantly warned that Brussels invited disaster by refusing to enforce them.

The tenor of this article tends toward warning America that it has a vested interest in ensuring against the failure of the EU, a rather ironic situation, considering that one of the primary reasons Europe consolidated economically was to compete against the US.  If we are to ride to Europe’s rescue again, it will not cost us in blood as in the previous two times over the last century, but it will certainly cost us in treasure.  We had better be very careful not to get entangled in the collapse of European economics, especially since the same problems that are causing it plague us here at home: overspending and government expansion.  Instead, we should lead the way out of the statist morass by innovating for smaller government and open markets.  That will be the best way we can help our friends to victory over there.