All has not been well for our neighbors across the Atlantic. Europe’s economy has been showing warning signs for several years now, and we may be only days from witnessing the collapse of the Euro.
Far from a distant concern, the collapse of the Euro could have a dramatic and long-lasting effect on the American economy.
In fact, countries around the world are so concerned about the global fallout from a European sovereign debt crisis that the U.S. Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank announced Wednesday their “coordinated actions to enhance their capacity to provide liquidity support to the global financial system.”
Typically, governments “sell” their debt to other countries to finance government spending. Others buy government bonds because they typically give a fairly secure, low-interest rate return. Easy money.
But when it looks like a country, say Italy, can’t pay back its debt, the investment gets riskier and investors expect a little more money back, for the extra risk. On Oct. 8, 2010, Italy’s 10-year bond yield was 3.744 percent. The same bond closed Wednesday at 7.021 percent.
This effect makes debt increasingly expensive for governments to finance their spending and can wreck an economy in a hurry.
But the damage doesn’t stop there. In 2010, the U.S. exported around $14.2 billion in goods and services to Italy. A collapse of Italy’s system would ripple through Europe and quickly pass through America as each collapsing country propelled the shut-down faster and faster.
When the severely ill are near death, they’re “circling the drain.” Europe is doing just that.
When several major banking systems vowed Wednesday to push more U.S. dollars into the global system in a effort to ease the already unsustainable pressure on European bonds, the DOW rose 4.24 percent, the Euro rose to $1.3443 from $1.3317 and global financial markets took a sigh of relief.
While the extra liquidity from the additional U.S. dollars in the global system should make it a bit easier for European countries to hold their debt under control, we’re not out of trouble yet.
President Obama told the European Council recently that “the United States stands ready to do our part to help them resolve this issue.”
As a globalized country which trades heavily in Europe, we can do no less.
 
Devin Graham is a 22-year-old economics senior from Prairieville. Follow him on Twitter @TDR_DGraham.
 
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Contact Devin Graham at [email protected]