Eurozone Troubles Impact U.S. Economy

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Stocks tumbled again today. We can't be sure exactly why. Investors may still be upset over last week's jobs report, an even bigger concern may be Europe. Governments there are having a hard time managing their debt burden. And Europe's problems could soon spell additional trouble for the U.S., as we hear from NPR's Tom Gjelten.

TOM GJELTEN: The U.S. economic slowdown is worrisome, but when economists and market analysts explain what's been troubling the U.S. stock market recently, one phrase comes up again and again: The problem is Europe.

Uri Dadush is head of the global economics program at the Carnegie Endowment.

URI DADUSH: Markets realize that there is a major financial crisis brewing in Europe that could explode at any time. I mean by that in the course of the next week or the next month or the next three months.

GJELTEN: Several European countries are facing big debt and deficit challenges right now, and the interest rates they have to pay have risen so much that they could soon have a hard time making their debt payments.

Governments could address those problems by bringing their spending down, by enacting reforms to make their economies more competitive, and by agreeing essentially to rescue the countries in greatest danger. But those are political challenges.

Bruce Kasman, the chief global economist at JP Morgan, says investors are generally losing confidence in the willingness of policymakers to make tough choices and nowhere more so than in Europe.

BRUCE KASMAN: There is real concern that some small countries and even a big country's inability to deal with its fiscal problems could create a financial stress point and that could spill out much more broadly across the globe.

GJELTEN: Until fairly recently, investors have been willing to buy Greek, Portuguese, Italian, and Spanish government bonds, which in turn has permitted those governments to borrow the money they need. But that's changing.

Investors are losing faith that the stronger governments using the euro currency, like Germany, will support the weaker eurozone countries. One way to do that would be to turn their monetary union into a fiscal union, where tax and spending policies are centrally coordinated. Uri Dadush says the future of the euro currency is now at stake. Markets are forcing European governments to make a tough choice.

DADUSH: Do you undertake much more far-reaching measures towards a fiscal union or do you allow those countries to collapse, the euro to collapse, and trigger then a global financial crisis?

GJELTEN: There could be a chain reaction. If the most heavily indebted European countries default on their debts, the European banks that lent them money would be in trouble. So would any U.S. bank that insured those debts or that lent money to those European banks. There'd be a spiraling default scenario reminiscent of 2008, maybe even worse, says Uri Dadush.

DADUSH: Clearly we are talking about an event of similar, perhaps larger, magnitude than the one that we were hit with back in 2008.

GJELTEN: That's because governments don't have the same policy tools available now to deal with a crisis that they had three years ago. No wonder the markets are tanking, from New York to Frankfurt. The question is whether the market downturn will galvanize European governments to face their challenges. European leaders are promising they've gotten the message, but investors are apparently not yet convinced.

Tom Gjelten, NPR News, Washington.

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