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Even Indirect Effects of the Euro Crisis Could Be Severe

by Thomas H. Manning, published

While Europe is known for its vibrant history and touristic lure, it has been plagued by widespread financial turmoil that has brought the Euro to the brink of collapse. The US is undoubtedly affected by the situation across the Atlantic, and the sentiment about European financial markets plays out on Wall Street. Even indirect effects of the Euro crisis could be severe for American markets and consumers.

The debt crisis that began in Greece has spread to other countries such as Spain, Italy, and Portugal. A variety of domestic policies doomed the nations to irresponsible government spending. Recent reports fear Greece’s economy is moving closer to collapse, as unemployment and social unrest continue to rise.

After years of dishing out generous social welfare and public pensions, among other spending gaffes, Greece’s debt to GDP ratio has swelled to around 170%.

Nearly 70,000 protesters participated in two demonstrations on October 18, in what became the country’s second General Strike. The public action ended in clashes with police, seemingly commonplace on the streets of Athens.

Spain is increasingly finding itself in a similar predicament.  The country has been in economic recoil since 2011, and has experienced an even deeper, and hasty, slide this year.

Spain’s current debt to GDP ratio is about 68 percent, but is rising rapidly. The government has tried to curb debt by cutting spending, but have been met with virulent opposition by the public. Last week, thousands took to the streets of Madrid, angered by the painful cuts.

America could face serious, indirect effects of the Euro crisis and from defaults in countries like Greece and Spain. According to a May interview with Columbia economics professor Richard Clarida, no corner of the global economy is safe if the Euro fails or begins to crumble. The US is particularly entangled with Europe financially, including through interest rates, credit spreads, and bank operations.

The United States’ rampant debt, (given current US Commerce Bureau and US Treasury Data, the US debt to GDP ratio is around 107 percent) which has been incurred from spending on Medicaid and Medicare, Social Security, Federal Pensions, and two, expensive, longstanding wars, among other expenses and policies has been steadily increasing.

Effective January 2013, a set of severe budget cuts and tax increases will automatically be triggered if the deeply divided Congress cannot come to an agreement on the budget. The next administration will face pressing decisions on how to handle rising US debt.

Currently, political independents, coveted as the voters that could determine the outcome of this election, are split rather evenly between Romney and Obama on economic issues. 49 percent say Romney is more empathetic with ongoing economic woes, while 45 percent side with Obama.

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