Europe: Isolated decline or huge threat to U.S. economic recovery?

In the wake of the U.S. presidential election, stock markets, as we reported yesterday, shed several hundred points. While some economists pointed to the fact that it was merely a reflection of fears about the approaching fiscal cliff, there is a possibility that this drop was partially a response to the other slow-burning powder keg just across the Atlantic: Europe.

As many investors know, the past several years have not been kind to the Old Continent. The astronomical amounts of public debt held by many of the countries, especially Greece, Italy and Spain, are the result of drastic actions taken during the 2008-09 financial crisis. The primary solution to this issue, supported by the healthier economies in Scandinavia as well as Germany, has been the use of fiscal austerity, embodied by budget cuts and tax increases. However, these measures have resulted in businesses shedding jobs and revenue levels hitting historic lows, thus starving governments of much-needed resources.

Crippling levels of unemployment is making things substantially worse. On October 31, Bloomberg News reported that European Union (EU) jobless levels hit 11.7 percent, the highest ever. When you break down this data into age groups the results are far messier. Twenty-three percent of EU citizens in the 18-to-25 age bracket are unemployed – however, on national levels, it's much worse. In Greece and Spain, youth jobless rates are 58 percent and 54 percent, respectively.

How might this damage the U.S. economic recovery? Bank defaults, which have so far been stifled by the actions of the European Central Bank, carry the risk of dragging American banks into their quagmire. This would tighten credit availability significantly which, considering that debt is a primary driver of growth, could plunge the U.S. economy back into recession.

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