The global financial crisis is not over. Ireland is just the latest domino to fall. Now that the Irish government has reluctantly accepted a European financial rescue plan that will undoubtedly lead to its political downfall, global speculators will turn to Portugal, whose divided government has been unable to meet the deficit targets imposed by Europe?s central bankers. When global financial markets have driven up the interest rates Portugal must pay to finance its debt, Spain will be next to feel the storm–and Spain?s bank troubles could put French and German banks in danger.
Europe?s financial turmoil threatens America in diverse ways. First, if global speculators drive up the interest rate that European governments have to pay to borrow on international capital markets, will they do the same to the United States? The Federal Reserve?s quantitative easing makes sense given the weakness of the American economy, but with global financial markets uneasy about the viability of Europe?s peripheral economies, America is unusually vulnerable. Second, European instability is keeping the euro from rising as high against the dollar as it should, which is bad news for Obama Administration hopes for a weaker dollar. Third, if Irish banks continue to falter, calling the viability of the UK?s banks into question, will America?s leading financial institutions be able to continue to withstand scrutiny? Two years after the Bush Administration began to bail out America?s financial system, it remains troubled by bad loans–that?s why commercial loans continue to lag. A fourth way that Europe?s troubles threaten America lies in Europe?s continued reliance on austerity policies to defuse the financial crises. Europe is a huge market for American exports; with Ireland, Greece, Spain, England, France, and Germany all adopting austerity budgets, will European parsimony dash hopes for an American export revival and stifle recovery?
Perhaps the entire discourse about the weak recovery is a form of wishful thinking. If we are indeed still in the midst of the financial crisis, then ?recovery? is far from certain. During the Great Depression, American banks had to be rescued by the Roosevelt Administration almost four years after Wall Street crashed. And recoveries aborted more than once before the Second World War revived global output. It is too early to say whether we are suffering the pain of a weak recovery, or whether we are stuck in the maw of a global catastrophe.