The Euro Crisis
The European financial crisis has been one of the biggest economic destabilizers in the past year. As fears spread that countries like Greece, Italy, Spain, and Ireland won't be able to repay loans—largely made by banks in Euro giants Germany and France—nervous financial markets have begun to abandon European debt, driving up borrowing costs and sending some countries into a vicious cycle of austerity and low growth.
European leaders, like Germany's Angela Merkel and France's Nicolas Sarkozy, above, struggled to get ahead of the markets by finding enough money to backstop affected countries’ loans and solve the complex problems at the heart of the Euro, each successive failure to find a solution—from the June protests in Greece that forced bondholders to take haircuts to the ouster of leaders in both Italy and Greece—has increased uncertainty, hurt markets and lead to tightening credit.
That’s not all: As growth slows in Europe, it’s going to be trouble for Americans (the EU is our second-largest trading partner) and as the value of the Euro falls, European exporters will become a cheaper alternative to American manufacturers on the global market. Bank failures in Europe could hit our still-fragile financial system, too, hurting 401ks and making it harder for businesses and consumers to borrow money.
Right now, it’s still possible that the Euro leaders current plan to muddle through the crisis without wholesale reform will work, but if it doesn’t, get ready for another shaky 2012.
Photo via (cc) Flickr user europeanpeoplesparty