U.S., Europe worry about effects of possible recession
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Steve Chiotakis: European leaders are scheduled to meet tomorrow in Brussels, hoping to agree on a plan to restructure Greece’s debts and replenish the bailout fund there.
All this week, we’re talking about why Greece — which is the epicenter of the European debt crisis — is such a threat to the American economy. And today, a House Financial Services subcommittee will tap into that question.
Marketplace’s Nancy Marshall-Genzer is with us live from Washington with the latest on that story. Good morning, Nancy.
Nancy Marshall-Genzer: Good morning, Steve.
Chiotakis: What kind of effects might we see here in the U.S.?
Marshall-Genzer: Well, the big concern is how the U.S. would be affected if Europe slides into a recession. We would export less to Europe, as Europeans cut back on their spending. Steve, if you think about Boeing — Europe is one of its biggest markets.
I talked this morning about this with Tim Leunig. He’s an economist at the London School of Economics. And he says we would also see fewer European tourists coming to the U.S.
Tim Leunig: If you’re starting in Europe, America’s a relatively expensive destination. If people are not confident about the future, they won’t go on expensive holidays; they’ll go camping around the corner instead.
And Steve, Europeans would also be reluctant to travel if the euro fell more against the dollar.
Chiotakis: What are the chances, Nancy, of a recession in Europe?
Marshall-Genzer: Some of the economists testifying at today’s hearing have released prepared remarks of what they’re going to say today. And one of them says there’s a one-in-four chance of a European recession. So, it’s not definitely going to happen, but that’s a pretty significant chance.
Chiotakis: How would U.S. banks be affected by a slowdown or some sort of recession in Europe?
Marshall-Genzer: U.S. banks don’t hold a lot of debt from some of the more troubled countries in Europe like Greece and Spain. But we do, of course, have a global financial system.
And Leunig told me that the banking system is like a big — not very fun — game of dominoes. Banks around the world borrow money from each other. Normally, a bank can borrow money for a few days — it’s no big deal. But if a bank appears to be on the brink of trouble, other banks just won’t lend to it.
And if banks stop lending to each other, more banks get in trouble; like a virus, like dominoes. Leunig says this happened in the 1920s, and at the beginning of the financial crisis in the U.S., when Lehman brothers failed.
Chiotakis: Marketplace’s Nancy Marshall-Genzer. Nancy, thanks.
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