Eurodoom Continues Apace–Is America Next?

I’m late to this particular party, but the news out of the Eurozone keeps getting worse and worse:

The eurozone crisis has led to the region’s economy contracting at the fastest pace for almost three years and sent German business confidence tumbling this month.

Matt Yglesias notes the implications of the continuing “bank jog” (currency is fleeing the Eurozone periphery, as corporations pull their cash out and put it in German banks or elsewhere):

Something to note is that this is exactly what one of the downsides of leaving the euro would be. If Spain reintroduced the peseta, foreign firms would still sell some stuff to Spanish customers. But they probably wouldn’t want to leave many of their profits laying around peseta-denominated in Spanish banks, available as funds for lending to the Spanish domestic economy. Spain would end up capital-constrained and need to spend a lot of time worrying about its foreign exchange holdings. This is a real downside and not just something to gloss over. But the rub is that if you’re going to suffer massive capital flight anyway, then the case for ditching the euro gets that much stronger.

The natural question for Americans would be how much we would be hurt if the Eurozone suffered a disorderly breakup (and, let’s be clear, it would be extraordinarily bad at least within the European periphery, as a bunch of the world’s largest economies watched their banking sectors collapse at the same time). According to Paul Krugman, US exports to the Eurozone only total about 2 percent of GDP, and since imports wouldn’t utterly cease even in the worst case, that mechanical effect of reduced foreign purchases of our goods and services wouldn’t be catastrophic.

But as Krugman notes, the real danger is through the financial channel. Modern banks are huge and heavily interconnected across countries, and some are thoroughly rotten. Bank failures across Europe could potentially trigger a Lehman-like financial shock in the US. One would think, given how long everyone has been watching the Euro problem, that banks would have figured out ways to protect themselves, but JPMorgan’s recent monster loss and MF Global’s bankruptcy (which killed itself gambling on European debt, remember) have thoroughly undermined my confidence.

I don’t think it’s possible to know for sure just what kind of craziness the financial elites have cooked up until the bets are called in. Might be we’ll see soon.

Follow us on Twitter @washmonthly, and Ryan @RyanLouisCooper

Ryan Cooper

Ryan Cooper, a contributing editor of the Washington Monthly, is currently the Washington correspondent for The Week.