What about the rest of the world? The US has only moderate exposure to the EU through its exports. US exports to the eurozone are only 1 to 2 percent of US GDP. US banks, while more stable than their euro counterparts, have not fully disclosed their exposure through loans, bonds or derivatives, and this could cause problems. In addition, many US multinationals have heavy European exposure, and an EU meltdown would hit their profits and US stock values. While the direct impact of European contraction would further retard an already anemic growth rate and put more pressure on Congress to spend more or keep taxes unsustainably low, it would not cause a depression in the US. Deficit hawks are correct that overtime spending must grow less rapidly and tax revenues must grow faster. Stimulus spending and tax cuts – though necessary if the EU falters – would further delay critically necessary fiscal changes.

The euro crisis could be a greater challenge for China. While May exports have shown some strength, several quarters of credit tightening have reduced inflation and real growth in China. Because local officials are promoted when they report good growth, actual growth may lag behind official data, already showing a slowdown. Data on electricity growth, fairly reliable data and highly related to output, show low single digits of growth. Excessive real estate and industrial investment have created excess capacity. State enterprise monopolies and oligopolies and economic uncertainty keep personal incomes and consumption low at only about a third of GDP, compared to double that ratio elsewhere.