Developments in Europe

June 5, 2012

In an unexpected move today, the G7 group of industrialized nations held an emergency meeting to discuss the deteriorating economic situation in Europe and the urgent need to recapitalize banks in Spain. Details continue to emerge that reveal the depth of both the debt crisis and its effects on the European economy.

Spain’s borrowing costs continue to rise effectively shutting out Spain from capital markets, according to Spain’s Treasury Minister Cristobal Montoro. As Spain struggles to navigate its banking crisis, many fear a broad banking crisis will further drag down the euro zone as risks remain high Greece may leave the euro zone after June 17th’s elections. These concerns have resulted in panic in financial markets.

For German Chancelor Angela Merkel, the answer to these concerns is “more Europe, not less.” Germany, who is pro-austerity measures and against issuing euro bonds to fund debt, has agreed to the possibility of pooling bad euro zone debt into a fund to be paid of over 25 years. To be clear, this is not the common issuing of euro zone debt, but instead a coordinated effort to control countries’ debt and stabilize bond markets.

As the world holds its breath, economic activity in Europe is dwindling signaling fears of a contraction in the second quarter. Last week, President Obama claimed the weakening European economy was creating a drag on the U.S. economy. Further downturns all spell trouble for U.S. companies. Technology companies, automakers, and the food and beverage industry are all examples of U.S. business that derive significant revenue from Europe. Uncertainty and fear resulting from inaction in the euro zone to face the problem of gross government spending not only affects revenue and job growth in Europe but in the U.S. as well. Debt reduction is greatly needed at home and abroad to provide the fiscal responsibility that economies worldwide need to succeed.

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