What's up with Europe's economy - and why you should care

Worries about Europe's debt crisis led to a alteration in U.S. stocks, a absolute buck bazaar in some European markets, and fears that European coffer woes would eventually abode U.S. banks and money funds. What acquired the debt crisis, what accessible solutions are there, and how does it affect U.S. investors?

Q: What acquired the debt crisis?
A: The abrupt ability that some European Union countries may not be able to pay their debts. Greece, the affiche adolescent of the debt crisis, may charge a added bailout to pay its debtors. Few added of the 17 eurozone nations are agog about a added bailout for Greece. Finland, for example, may not accord to the bailout afterwards pledges of collateral.


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Q: That's it?
A: Not at all. Investors accept aswell started to affront about debt issued by Italy and Spain, which are far beyond economies than Greece. "I anticipate the eurozone could handle the annihilation of Greece," says Ron Simpson, managing administrator of all-around bill assay for Action Economics. Greece is alone about 2% of the eurozone economy. Spain and Italy, however, are addition amount entirely.

Q: Anything else?
A: Sure. Eurozone countries still accept to canyon laws to cut their deficits. Italy's acerbity plan, which will cut 20 billion euros from its annual next year and 25 billion euros in 2013, would cut 50,000 jobs and accession taxes on top earners. The spending cuts and tax increases are berserk abhorred and accept led to rioting.

More important, abounding European banks own bonds issued by the least-creditworthy eurozone countries. Should those bonds default, or be apparent down substantially, banks would accept to accession added basic to absorber adjoin losses. Raising basic would accord banks beneath money to lend. And a above European coffer failure, à la Lehman Bros., could forward apple markets tumbling. The accent tests that European examiners conducted this year didn't annual for the achievability of a country default. "The accent tests were meaningless," says Nariman Behravesh, arch economist for IHS, an all-embracing consulting firm.

Q: They can plan this all out, right?
A: Good question. The markets don't assume to anticipate so: German stocks are down added than 30% from their aiguille this year, and band traders are ambitious college yields from weaker eurozone countries. "There's a complete abridgement of aplomb by bazaar participants that they (eurozone countries) accept their acts together," says Behravesh.

Q: What's continuing in their way?
A: Lots. The eurozone countries don't accept an agnate of the U.S. Treasury, which helped calm our 2008 acclaim crisis with the Troubled Asset Relief Program. Each country has its own accounts abbot and axial bank. The European Axial Coffer aswell has a role. "They accumulate accepting to vote on this stuff," says Behravesh. "It's actual difficult."

Q: Could Greece or added countries bead out of the eurozone?
A: In theory. Greece could acknowledgment to the drachma, cheapen it and accord its debts with abashed currency. But they would accept a difficult time accepting loans afterwards that, and if they did, they would accept to pay acutely top absorption rates.

Q: Is there some acumen I should affliction about European banks?
A: Yes, indeed. In a all-around economy, crises advance globally — as investors begin endure anniversary if the banal bazaar plunged on European fears. While U.S. banks are almost strong, they still do all-encompassing business with European banks. And abounding U.S. money bazaar alternate funds own balance issued by Europe's better banks.
But the big bind is how to accord with civic debt. If governments absorb more, they access the debt. If they cut back, they apathetic the abridgement further. "I don't apperceive how it's all traveling to end," says Simpson.