Definition of 'Euromarkets' The market that includes all of the European Union member countries - many of which use

the same currency, the euro. All tariffs between Euro market member countries have been abolished, and import duties from all non-member countries have been fixed for all of the member countries. The Euro market also has one central bank for all of the member countries, the European Central ank !EC ".

Also known as #the common market#.

Introduction: The market comprised of the member countries of the European Union !EU". The Euro market includes countries that have fixed external tariffs and no internal tariffs, and follow the monetary policy set by the European Central all states in the EU. Euromarkets !occasionally called %xenomarkets&" are markets on which banks deal in a currency other than their own. 'or example, Eurodollars are dollars held by banks outside the United (tates. The prefix %euro& refers to the fact that such deposits first appeared in Europe in around )*++. The ori,ins of the Eurodollar are traceable partly to the Cold $ar, when the U((- !in particular" desperately needed international li.uidity / dollars - but did not want to hold them in the United (tates. The rise of the dollar as an international currency encoura,ed companies world-wide to hold dollar cash reserves, and banks to ask for dollars on deposit. (ome countries decided that such deposits did not need to be so closely re,ulated as deposits in the national currency because they did not affect the internal money supply. This produced a very liberal loan market, particularly in comparison with the prevailin, heavy post-war re,ulation. 0n top of that, America&s 1 re,ulation !put in place by the )*22 3lass ank. $hile many member states do use the Euro as their common currency, the Euro market applies to

(tea,all Act" set a ceilin, on the interest rates payable on bank deposits and so savers looked for more attractive rates elsewhere. (imilarly, Eurobonds benefited from an e.ualisation tax imposed in )*42 on interest payable on forei,n issues placed in the U(A. 5ondon played a key role in the development of Euromarkets. Eurodollar loans, still ne,li,ible in )*+6, rose to 7+ billion dollars in )*46 and )28 billion in )*92. At that time 5ondon accounted for almost 68: of the market, which was still lar,ely controlled by 5ondon branches of forei,n banks / mostly American, but also some 'rench, ;apanese and 3erman. in 5ondon. $hile the main incentive for the development of Euromarkets was the avoidance of national re,ulations, their development also helped to weaken those same re,ulations by providin, both borrowers and lenders with alternatives to nationally re,ulated solutions. The lo,ical outcome of Euromarkets was the liberalisation of capital movements. They undoubtedly represented one nail in the coffin of the retton $oods fixed exchan,e rate scheme, which assumed that central banks were capable of controllin, exchan,e rates= this they could only do if they could control capital flows, at least in the short term. y )*9+ there were 7<2 such subsidiaries

BARRY EICHENGREEN: Euro needs a reset ))>)8>78)7 ? arry Eichen,reen European monetary union requires a re oot ut !opes it can !appen y t!e end of t!e year are misp"aced $ith every day that passes, it becomes harder to deny that Europe&s leap to monetary union was a mistake. Creatin, a monetary union without also creatin, a bankin, union allowed the continent&s banks to run wild. @t meant that the monetary union lacked an ade.uate mechanism for windin, down insolvent financial institutions. Creatin, a monetary union without also creatin, a fiscal union meant that there was

no way of transferrin, resources from boomin, to depressed re,ions. @n its absence, the latter were consi,ned to the perdition of depression and crushin, debt. The ,ood news is that European leaders / includin,, critically, 3erman leaders / appear to understand these facts. etter still, they finally seem committed to doin, somethin, about them. At their historic 7* ;une summit, leaders committed to creatin, a bankin, union with a sin,le supervisor and the capacity to make direct capital inAections by the end of the year. Then last week we learned of a plan drafted by Berman Can -ompuy, the president of the European Council, to create a central euroDone bud,et with a dedicated fundin, source. That bud,et would be a mechanism for financin, interstate transfers and possibly a common unemployment insurance scheme. This limited fiscal union will also be in place, ideally, by the end of the year. ut how can Europe possibly achieve a consensus on such far reachin, reforms in less than three monthsE Bow, in particular, can 3ermany and its Forthern European nei,hbours be reassured that they will not be makin, open-ended and ultimately disastrous financial commitmentsE The official answer is Gstren,thened safe,uards.H To ensure that bankin, union is fair and s.uare, the sin,le supervisor will be ,iven teeth. Unlike the European ankin, Authority, which can only recommend, the sin,le supervisor will be able to demand prompt corrective action and be authoriDed to intervene directly in troubled financial institutions. And to prevent the fiscal union from becomin, a transfer union, all euroDone members will have to submit to the kind of ne,otiated pro,rammes, detailed conditionality and close monitorin, now re.uired of bailout countries. ut there is also another answer desi,ned to appeal, specifically, to nervous 3erman voters. Any bankin, and fiscal union will only address future problems. @t will not also be used to resolve inherited ones. 'ollowin, their meetin, two weeks a,o, the 3erman, Iutch and 'innish finance ministers reiterated their support for a bankin, union but not one that would deal with the banks& inheritance of bad Gle,acyH assets. (imilarly, the Can -ompuy plan for limited fiscal union, which is said to come with stron, 3erman support, is seen as an alternative to mutualiDin, inherited soverei,n

debts. @t will be there to address the limited debt problems of the future not the inheritance of le,acy debt. This plan can thus be sold to 3erman voters as a way of rebootin, the monetary union. $ith the slate wiped clean and stren,thened safe,uards in place, there will be no presumption that transfers will ,o in one direction or another. Europe will, in effect, be turnin, the clock back to )***, but this time with the necessary bankin, and fiscal unions in place. The problem bein,, obviously, that what works for 3ermany doesn&t work for the others. $ithout debt mutualiDation, southern Europe will still have its crushin, burden of soverei,n obli,ations. $ithout direct capital inAections funded by the E(J, it banks will still be wei,hed down by their nonperformin, le,acy assets. The Can -ompuy plan for limited fiscal union and the 3erman plan for limited bankin, union promise Europe a happy future once the crisis is over. ut they do nothin, to end it. Ultimately, there will have to be some form of debt mutualiDation. The only alternative, debt restructurin,, is no lon,er feasible now that European debt markets have been renationaliDed. @ncreasin,ly, (panish and @talian ,overnment debt is held by (panish and @talian banks and pension funds. This makes restructurin, less attractive economically, since it will bankrupt those banks and pension funds. @t also makes it less attractive politically. (imilarly the bankin, union, in the end, will have to absorb the cost of writin, down the banks& nonperformin, le,acy assets. The crisis countries simply lack the fiscal capacity to solve this problem on their own. The implication is that the fiscal and bankin, union that the Euro Done needs won&t be created by the end of the year. 'ive years is more like it. The issues to be resolved are contentious and difficult. They won&t be disposed of overni,ht. (o can Europe hold it to,ether for five more yearsE That&s the 4<,888 euro .uestion. Ion&t ask me to answer it. Ask Jario.

E#ERGING #AR$E% An emer,in, market economy !EJE" is defined as an economy with low to middle per capita income. (uch countries constitute approximately 68: of the ,lobal population, and represent about 78: of the worldKs economies. The term was coined in )*6) by Antoine $. Can A,tmael of the @nternational 'inance Corporation of the $orld ank. Althou,h the term #emer,in, market# is loosely defined, countries that fall into this cate,ory, varyin, from very bi, to very small, are usually considered emer,in, because of their developments and reforms. Bence, even thou,h China is deemed one of the worldKs economic powerhouses, it is lumped into the cate,ory alon,side much smaller economies with a ,reat deal less resources, like Tunisia. oth China and Tunisia belon, to this cate,ory because both have embarked on economic development and reform pro,rams, and have be,un to open up their markets and #emer,e# onto the ,lobal scene. EJEs are considered to be fast-,rowin, economies. &!at an E#E 'ooks 'ike EJEs are characteriDed as transitional, meanin, they are in the process of movin, from a closed economy to an open market economy while buildin, accountability within the system. Examples include the former (oviet Union and Eastern bloc countries. As an emer,in, market, a country is embarkin, on an economic reform pro,ram that will lead it to stron,er and more responsible economic performance levels, as well as transparency and efficiency in the capital market. An EJE will also reform its exchan,e rate system because a stable local currency builds confidence in an economy, especially when forei,ners are considerin, investin,. Exchan,e rate reforms also reduce the desire for local investors to send their capital abroad !capital fli,ht". esides implementin, reforms, an EJE is also most likely receivin, aid and ,uidance from lar,e donor countries and>or world or,aniDations such as the $orld ank and @nternational Jonetary 'und 0ne key characteristic of the EJE is an increase in both local and forei,n investment !portfolio and direct". A ,rowth in

investment in a country often indicates that the country has been able to build confidence in the local economy. Joreover, forei,n investment is a si,nal that the world has be,un to take notice of the emer,in, market, and when international capital flows are directed toward an EJE, the inAection of forei,n currency into the local economy adds volume to the countryKs stock market and lon,-term investment to the infrastructure. &or"d Bank "ist and Definition of Emer(in( #arkets $hat is an Emer,in, JarketE The le,islation defines an emer,in, market as any country that the (ecretary of A,riculture determinesL @s takin, steps toward developin, a market-oriented economy throu,h the food, a,riculture, or rural business sectors of the economy of the country= and Bas the potential to provide a viable and si,nificant market for U.(. a,ricultural commodities or products of U.(. a,ricultural commodities. ecause EJM funds are limited and the ran,e of potential emer,in, market countries i worldwide, consideration will be ,iven only to proposals that tar,et countries or re,ional ,roups with per capita income of less than N)7,)*+ !the current ceilin, on GUpper Jiddle @ncomeH economies as determined by the $orld ank $orld Ievelopment @ndicators"= and populations of ,reater than ) million. @ncome limits and their calculation can chan,e from year to year with the result that a ,iven country may .ualify under the le,islative and administrative criteria one year but not the next. Therefore, CCC has not established a fixed list of emer,in, market countries. A few countries technically .ualify as emer,in, markets but may re.uire a

separate determination before fundin, Can be considered because of political sensitivities. H)& E*R) CRI+E+ +%AR% @n that time, the crisis has ,rown into the bi,,est challen,e the European Union has faced since the adoption of the euro as its sin,le currency )7 years a,o. 3reece, Mortu,al and @reland are on life support. @taly and (pain are exhibitin, worryin, symptoms. 3ermany and 'rance, the healthy ones, are sufferin, from a ,lobal economic malaise. As the situation appears to be comin, to a head, a,ain, here are five key issues to keep an eye on. ). (tability fund is not very stable @n ;uly, European political leaders announced a set of proposals to address the crisis, includin, a second bailout for 3reece, which was teeterin, on the ver,e of default. The centerpiece of the a,reement was the proposed reform of the European. The fund was set up last year to facilitate low-cost loans for stru,,lin, EU members includin, Mortu,al and @reland. Under the proposed reforms, the O<<8 billion fund would be able to buy bonds issued by distressed euro area ,overnments directly from investors in the secondary market. @t would be able to do this for nations that do not have an existin, bailout pro,ram, such as @taly and (pain. oth nations are stru,,lin, with unsustainable levels of debt and dim economic prospects. The revamped fund would also be able to provide lines of credit to nations that need to shore up under-capitaliDed banks. The proposed overhaul must be approved by the individual ,overnments of all )9 counties that use the euro. Euro area leaders have said they plan to implement the chan,es by mid 0ctober. ut the bi,,er .uestion is how effective the stability fund will be, even with its new powers. @n particular, investors are concerned that there may not be enou,h money in the fund if (pain or @taly need to be rescued.

Alternatively, policymakers and investors have been discussin, ways to enhance the effectiveness of the fund without raisin, its price ta,. The push to reform the stability fund also faces si,nificant political headwinds in many northern European nations, where the idea of providin, additional support for countries that overspent is deeply unpopular amon, voters. (o far, six countries have ratified the chan,es, includin, 'rance, @taly, (pain, @reland, 5uxembour, and el,ium. This week, the overhaul is expected to be passed by lawmakers in (lovenia, 'inland, 3ermany and Austria. 7. 3reece and @taly are on a knifeKs ed,e @n addition to expandin, the stability fund, euro Done leaders a,reed to provide another )8* billion euro packa,e of low-cost loans for 3reece. 5ike the stability fund reforms, the second bailout must be approved by all individual euro area ,overnments. The move initially eased concerns that 3reece would default on its debts. conditions necessary to obtain its latest installment of bailout money. 3reece is in talks to secure the sixth round of fundin, from last yearKs O))8 billion bailout, worth O6 billion. $ithout those funds, the country is expected to run out of the cash it needs to pay all of its bills by mid 0ctober. 0n (ept. 7), the 3reek ,overnment announced a series of Aob cuts and pension reductions followin, intense ne,otiations with its bailout providers at the @nternational Jonetary 'und, European Commission and European Central anks. The cuts will enable 3reece to meet its bud,et tar,ets for this year and next, the ,overnment said, pavin, the way for the release of its next dose of bailout money. As part of the second bailout for 3reece, banks and investors a,reed to accept a 7): writedown of the value of 3reek ,overnment bonds on their books. ut there has been increasin, talk about the need for 3reek bondholders to take even lar,er #hair cuts,# as the writedowns are called. Jeanwhile, investors have also been ,rowin, worried about @taly. ut those fears resurfaced in (eptember amid si,ns that Athens may not meet some of the

The third-lar,est economy in Europe, @taly is considered too bi, to fail. $hile the nation has a relatively small bud,et deficit, @taly has debts e.ual to nearly )78: of its ,ross domestic product. At the same time, @talyKs decade-lon, economic slump is not expected to end anytime soon, makin, it difficult for the nation to pay off its debts. @taly has proposed a series of austerity measures aimed at reducin, its debt burden. ut investors remain nervous about the ,overnmentKs ability to implement the unpopular belt-ti,htenin,. 2. anks are under heavy pressure The debt problems in 3reece and @taly are threatenin, to spill over into the European bankin, system. Accordin, to the @J', European banks face a O788 billion credit risk stemmin, from direct exposure to ,overnment debt issued by 3reece, Mortu,al, @reland, (pain, @taly and el,ium. @ncludin, exposure to banks based in those troubled economies, banks face a total credit risk of O288 billion, the @J' estimates. The @J' and others have called on European banks to raise more capital to provide a buffer a,ainst potential losses on distressed soverei,n debt. (hares of several maAor European banks, includin, many 'rench financial institutions, have plun,ed to their lowest levels since the 7886 crisis. @n addition to the threat of losses on soverei,n debt, investors are concerned about banksK ability to raise fundin, as key pools of li.uidity have dried up. EU officials have also maintained that stress tests conducted in ;uly prove that European banks have sufficient capital. And there is always the EC , which has already provided some relatively small loans to European banks. capital. <. Economy is in the dumps ut ,iven the challen,in, stock market and concerns about a pullback in interbank lendin,, banks in Europe appear to have few options to raise

Economists say the weaker members of the euroDone will not be able to repay their debts and live without bailouts until economic activity resumes in a bi, way. That seems unlikely ,iven the outlook for economic ,rowth in Europe and around the world. The EC recently lowered its forecast for economic ,rowth across the euroDone for this year and next. The central bank now expects ,rowth of only ).<: and ).6: in 78)), and between 8.<: and 7.7: in 78)7. oth are down from earlier forecasts, and the risks to that ,loomier outlook are now to the downside, rather than balanced as the EC had previously said. @n the second .uarter, overall economic activity amon, the )9 nations that use the euro ,rew only 8.7: compared with the first .uarter, accordin, to Eurostat. 3ermany, the re,ionKs economic powerhouse, reported a paltry 8.): increase in second-.uarter ,ross domestic product, compared with a more robust ).2: in the first .uarter. ut economists say 3ermany is still on track for modest ,rowth in 78)). The 3erman economy is heavily dependent on exports and has benefited from rapid ,rowth in emer,in, nations such as China. As activity cools in those markets, the outlook for 3ermany has dimmed. The slowdown raises troublin, .uestions about the lon,-term outlook for the euroDone. +. 'ate of euroDone is at risk The crisis has brou,ht to li,ht problems that many analysts say will re.uire a fundamental chan,e in the way the European Union operates. The euroDone nations have enAoyed the benefits of a shared currency and uniform monetary policy since about )***. Bowever, aside from certain unenforced bud,et tar,ets, the ,roup has never had a common approach to fiscal policy. The lack of coordination has resulted in a situation where stron,er members of the union are now bein, forced to help support less competitive members that have spent beyond their means. @f they donKt, many analysts say the euro proAect may not survive the crisis in its current form.

The fear is that either weak members of the currency union will ,o bankrupt and be forced out, or stron,er members will become unwillin, to prop up fiscally challen,ed nei,hbors and strike out on their own. European leaders have said repeatedly that they will do whatever it takes to preserve the euro, ar,uin, for a more uniform approach to spendin, and taxes across the European Union. ut movin, towards ,reater fiscal inte,ration raises serious .uestions and could involve rewritin, EU treaties, somethin, that may take years to achieve. @n the meantime, investors have been callin, for the creation of a so-called Eurobond, which would be backed by all )9 euro area nations. @ssuin, a common form of debt would ease borrowin, costs for the weaker members of the union. ut it would also drive up rates for the stron,er nations and could AeopardiDe their credit ratin,s. The European Commission is explorin, different Eurobond options in preparation for an official proposal. ut EC officials have cautioned that issuin, a new form of debt is not a lon,-term solution to EuropeKs debt crisis.

Ho, Conta(ious Is Europe-s Economic Crisis. y (alim 'urth, Mh.I. and ;ohn 5. 5i,on September 18, 2012 A stract: Europes economic problems are already affecting the U.S. economy. An e panding European crisis could affect the U.S. through the financial sector, reduced demand for U.S. e ports, disruption of global supply chains, and political disruption in Europe. !he U.S. can best help Europe by pursuing sound economic policies at home, starting "ith pulling bac# from the approaching fiscal cliff. !he U.S. should also encourage European states to implement policies that foster free mar#ets, lo"er their ta rates, and reform their unsustainable "elfare systems. Jany countries in the euroDone are on the brink of financial insolvency. 5ar,e, ,lobal European banks could fail. The euroDone could break up. Any of these potential ne,ative outcomes would be felt well beyond the borders of Europe. A European economic crisis could affect the U.(. economy throu,h several channelsL

Current effects/ The U.(. is already affected by lower demand for exports and hi,her uncertainty in Europe. %!e financia" sector/ The financial sector is the channel most likely to transmit Europe&s recession to the U.(. European banks are at risk because of their extensive holdin,s of ,overnment debt. Demand/ The U.(. exports N7<8 billion annually to the European Union !EU". (evere recession in Europe would further weaken U.(. exports and the prospects for economic ,rowth. +upp"y/ Iisorderly exits from the euroDone could disrupt ,lobal supply chains and could hurt short-run ,rowth in the U.(. @n the lon, run, Europe needs to liberaliDe its markets in order to contribute to ,lobal ,rowth. 0o"itica" effects/ Europeans are not immune to electin, bad leaders. Elections in Europe could dama,e cooperation on a variety of fronts, from FAT0 to trade policy. $ithout reform, Europe&s future looks bleak.

@n the short term, American policymakers should address the Gfiscal cliff,H which poses ,reat risks to the U.(. economy. (tability in America would ease Europe&s path out of its own crisis. 'or the lon, term, America should emphasiDe how free markets, low tax rates, and welfare reform have allowed the U.(. to maintain its income advanta,e over Europe. Current Effects There is no need to wonder whether the prospect of European economic problems will affect America&s economy. @t is already affectin, economic decisions. Bowever, Europe&s uncertainty is not the primary cause for the slow U.(. economic recovery since 788*. 0verre,ulation, balloonin, deficits, and loomin, tax increases in 78)2 are lar,er and more direct dra,s on American ,rowth. Currently, the crisis unfoldin, across most of Europe affects the U.(. economy in four distinct waysL

%!e current economic s"o,do,n in Europe reduces demand for */+/ e1ports/ Consumption in the euroDone has ,rown at an annual rate of ).8 percent since the be,innin, of 7886, compared with 2.4 percent annually over the previous four years. Even worse, euroDone imports have declined from a 7889 hi,h. The European divisions of U.(. multinationals, such as 'ord and 3eneral Jotors, have lost money as sales have declined. U.(. ,oods exports to Europe dropped 78 percent from a hi,h in 7886 to a low in 788* and then recovered rapidly over the next two years. U.(. exports to Europe ,rew )) percent from 78)8 to 78))Pmuch faster than the overall economy.Bowever, year-overyear ,rowth slowed to less than 7 percent in the first six months of 78)7. *ncertainty a out t!e euro-s future !as kept t!e do""ar e1pensi2e3 makin( */+/ e1ports "ess competiti2e/ Althou,h how expensive the dollar would be in the absence of European uncertainty is unknown, risk-averse investors fleein, euro-denominated assets have driven up the price of the dollar. Althou,h many factors affect exchan,e rates, the uncertainty about the euroDone has probably driven the yearlon, increase in the price of the dollar.

*ncertainty a out t!e !ea"t! of European

anks !as "ed */+/ money

market funds to disen(a(e/ 'ear of a European bankin, collapse compels U.(. investors to eschew potentially profitable investments in European money markets. Thus, Americans& retirement funds, mutual funds, and other investments are sli,htly less profitable than they would be if European banks were on firm footin,.

0o"itica" and economic uncertainties dissuade risk takin(/ Uncertainty about Europe&s future and the extent of future crisis transmission make U.(. investors more cautious and less innovative, slowin, ,rowth and technolo,ical pro,ress. 5on,-term economic ,rowth is driven by lowerin, the costs of production and increasin, the product varieties available to consumers. Entrepreneurs, mana,ers, and venture capitalists are less likely to take the risks that increase productivity when the future markets for their products are uncertain.

4inancia"5+ector Effects The financial sector in Europe has been on doubtful footin, since the 7886 crash. A European financial panic of any variety could have si,nificant ,lobal repercussions, and the financial sector is the most important transmission mechanism from Europe to the U.(. Go2ernment De t/ European banks are more deeply connected to their respective ,overnments than American banks are to the federal and state ,overnments. Iespite the common currency, euroDone banks hold lar,e shares of their own ,overnments& debtL @n 3reece and 3ermany, domestic banks hold around 78 percent of domestic ,overnment debt, and (panish banks hold almost 28 percent of (pain&s debt. 0ther domestic institutions, such as pension funds and insurance companies, hold even more domestic debt. The interconnectednessPor codependencyPof ,overnment and banks means that a crisis in one can cripple the other. 'or instance, if the risk of soverei,n default rises, domestic banks would find that their assets are much less valuable and would face the nasty choice of refusin, to roll over ,overnment debtPwhich would precipitate a

crisisPor a,reein, to lend the ,overnment the funds needed to pay back the banks, further entan,lin, the two sides. Jost European banks have chosen the second option, di,,in, furiously to escape the hole in which they are trapped. 3overnment risk or failure can affect banks in other ways. @n 3reece, the fear of a euro exit and forced conversion of 3reek bank deposits into drachmae has led many depositors to withdraw their savin,s from 3reek banks and move their money abroad. 0n the other side, if banks fail first, the ,overnment&s best bond-market customers are bankrupt. $ith diminished demand for ,overnment bondsPnot to mention the recession that often coincides with bank failurePyields on ,overnment debt would rise. $ith fewer customers for more debt, a ,overnment with a relatively healthy debt-to-3IM ratio can suddenly find itself at risk of defaultin,. (pain exemplifies conta,ion movin, from banks to ,overnment. (pain&s banks were loaded with mort,a,es that went bad when the country&s housin, bubble popped. Iespite modest debt and bud,et surpluses in six of the seven years precedin, the crisis, the bank crisis caused the ,overnment to lose control of its financin,. -e,rettably, the codependency does not stop at national borders. As of Jarch 78)7, 'rench banks owned almost half of the N977 billion of @talian debt held by forei,n banks and more than half of the N9* billion of 3reek debt. (panish and Mortu,uese banks were mutually entan,led. The U.Q. and el,ium owned too much @rish debt, and the Fetherlands owned a si,nificant amount of (panish debt. The ,ood news for Americans is that the U.(. is relatively insulated from the European tan,le of banks and ,overnment debt. As of Jarch 78)7, American banks owned only N)27 billion of debt issued by European countries that are currently in crisis.Even if that debt loses a lar,e portion of its value due to default, their total exposure is modest. #oney #arkets/ A primary form of international financial inte,ration is the world of money market funds. These are low-risk, low-return funds that allow investors to earn modest returns on li.uid assets. Joney market funds purchase low-risk commercial and ,overnment bonds.

ecause corporations tend to maintain workin, relationships with specific funds, losses in a fund can affect not only money market investors in that fund, but also corporations that rely on that fund to market their debt. Economists have found evidence that when a fund needs to shrink its asset base, its usual borrowers find it more difficult to issue new debt. (er,ey Chernenko and Adi (underam have documented that American prime money market funds rapidly divested from European banks durin, the summer of 78)). The Gslow motion runH on European banks reduced U.(. money market exposure from N<+2 billion !79 percent of all prime money market funds" to N769 billion in Au,ust 78)) and N)+< billion at the end of 78)). As investors withdrew money from money market funds with heavy euro exposure, American corporations that usually financed throu,h those funds decreased their issuance of new debt. U.(. money market investment in Europe stabiliDed durin, the first half of 78)7, endin, in Jay at N)** billion !)< percent of all prime money market funds". Bopefully, ,iven the robust attention that investors ,ive to this form of European exposure, the risk and return of euro-invested money market funds are at a desirable level for American investors. Althou,h the failure of one or more maAor European banks would hurt American money market investors, money markets have already had time to divest from the riskiest banks. At worst, a European bank collapse could lead to another money market GrunH on European banks and a slowdown in corporate borrowin,, albeit a less severe run than occurred in 78)). Credit Defau"t +,aps/ As Americans learned when the subprime mort,a,e bubble burst, credit default swaps !CI(" are an impressive financial lever. (waps levera,e investment, allowin, more investment with a ,iven amount of capital, but can also multiply the dama,e of a financial collapse. The main trouble with swaps is that they lack transparency. They are often difficult to price. The market for swaps disappeared once the U.(. housin, bubble burst, and a similar paralysis could result if a maAor European ,overnment or bank fails. @f so, those who own swaps would be stuck with an illi.uid asset of .uestionable value.

The ank for @nternational (ettlements ! @(" reports that U.(. banks had N426 billion in G0ther potential exposuresHPincludin, CI( and similar instrumentsPto Mortu,al, @reland, @taly, 3reece, and (pain !M@@3(" as of Jarch 78)7. This potential exposure dwarfs the direct exposure of U.(. banks to M@@3( debt, which stood at only N)27 billion. 'urthermore, other U.(. financial entitiesPsuch as mutual funds, union pension funds, and hed,e fundsPhave additional exposure not counted by the @(, althou,h their exposure is probably much smaller. 5ikewise, potential exposure to 'rench and Iutch debt derivatives is as lar,e as potential M@@3( exposure.@t is difficult to put an upper limit on the amount of American investment at risk if the crisis compounds with failures in the euroDone&s core. The ,ood news is that investors are more aware of the issues surroundin, CI( than they were in 7886. As the European debt crisis dra,s on month after month, financial institutions have the time to evaluate their holdin,s properly and rebalance as necessary. U.(. policymakers can lay a foundation for sober preparation by makin, it crystal clear that the federal ,overnment will not bail out banks or funds that lose money from European fallout. $hen mana,ers know they must live with the conse.uences of their decisions, they tend to invest more prudently. Corporate Bond Conta(ion/ Economists at the 'ederal -eserve ank of (an 'rancisco estimate that bond yields in the U.(. and Europe move to,ether. Usin, a narrative econometric approach, they find that when European corporations experience a )88-basis-point increase in the cost of borrowin, due to European economic uncertainty, the cost of borrowin, for American corporations increases by << to 6+ basis points. This effect is driven by international linka,es in borrowin, costs for hi,hly rated financial firms and low-rated nonfinancial firms. This evidence su,,ests not only that investors believe that the lar,estPand usually safestPU.(. financials are the most ,lobally inte,rated, but also that fiscally weak U.(. nonfinancial companies have the most to lose from a European recession.

The existence of yield conta,ion directly contradicts the hopeful !or cynical" hypothesis that weak financial markets in Europe make more lendin, available in the U.(. @nstead, the opposite is true in the private sector. 'or federal ,overnment borrowin,, any such ,ains would come throu,h lower interest rates. (ince rates are already near Dero, there is little room for improvement. Demand Effects Even as euroDone leaders take necessary steps to avoid a worst-case scenario !see text box, GBow a European -ecession Could Affect U.(. 3rowthL @B( 3lobal @nsi,ht 'orecastH", parts of Europe are already in recession. The EU reported ne,ative ,rowth in 78)) for 3reece, Mortu,al, and (lovenia,and the European Central that the euroDone is already in a recession that will last into 78)2. As noted, Europe is a key market for American exports. $ith slowed ,rowth, Europeans are poorer and demand fewer American ,oods. @ncreased uncertainty in Europe will also translate into a stron,er U.(. dollar a,ainst forei,n currencies. $hen the dollar is more expensive, American exports are less competitive, and European uncertainty hurts American exports around the world. $hile a stron,er dollar and slower ,rowth in forei,n economies diminish U.(. exports, reduced European demand for basic commodities, fuel, and Chinese ,oods could lower the prices of maAor U.(. imports. Thus, lower import prices would partially offset the effects of a recession in Europe. Any further downturn in EuropeP and any continued collateral dama,e to other world economies, especially maAor U.(. tradin, partnersPwould translate into lower demand for U.(. exports and overall ,rowth expectations. This channel of economic conta,ion is powerful but limited. Almost nothin, can be done to avoid ne,ative spillovers from a recession. Certainly, ,innin, up demand with ,overnment spendin, would be counterproductive in both the short run and the lon, run because it would increase the risk that the U.(. would follow Europe into debt crisis and austerity. A severe EU recession mi,ht decrease U.(. exports to Europe as much or more than the N+8 billion drop from 7886 to 788*. Althou,h that amount is ank proAects

lar,e, decreased imports would dynamically offset some of it, and N+8 billion represents only 8.82 percent of the U.(. economy. The best silver linin, to a European recession would be for European voters and leaders finally to decide to scrap the static model of economic activity on which socialist economic policies are based. (tatic economic models assume that Aobs exist by fiat and can be molded and distributed as politicians desire. Iynamic economic models reco,niDe that Aobs are created and destroyed followin, market incentives, not political wishes. The ,lobal economy needs a dynamic, ,rowin, Europe, employin, *+ percent of its labor force and inventin,, investin,, creatin,, and consumin,. Ho, a European Recession Cou"d Affect */+/ Gro,t!: IH+ G"o a" Insi(!t 4orecast Bow would a European recession affect U.(. ,rowthE Analysts at @B( 3lobal @nsi,ht, usin, a lar,e-scale macroeconomic model, forecasted the likely impact on the U.(. economy of a GpessimisticH scenario in the euroDone. This pessimistic scenario assumes an abrupt and disorderly 3reek exit from the euro with si,nificant dama,e to the European economy. A disorderly 3reek exit would incorporate many of the transmission channels discussed in this paper. The baseline forecast scenario incorporates an orderly 3reek exit, which has little effect on the U.(. @n the pessimistic economic outlook, there would be a dramatic reduction in economic ,rowth expectations in the euroDone and other world economies. The weaker ,rowth in maAor U.(. tradin, partners would reduce U.(. exports by about N2< billion instead of the baseline prediction of a N)8* billion increase in exports, leadin, to slower U.(. ,rowth in 78)2. Accordin, the @B( 3lobal @nsi,ht Au,ust 78)7 pessimistic scenario forecast, U.(. 3IM would contract 7.<8 percent in 78)2 relative to the baseline. !(ee Table )."

+upp"y Effects A mild recession in the euroDone would have beni,n supply effects on the U.(., but a breakup of the euroDone or a European depression would transmit ne,ative supply effects. A recession in Europe would have both positive and ne,ative supply effects on the U.(. economy. Mrices would fall due to decreased European demand for oil and other resources, benefitin, U.(. consumers and firms. Cheaper inputs for U.(. producers

would increase profitability, enablin, them to hire more workers and pass savin,s on to consumers. 0n the ne,ative side, some European companies that supply intermediate ,oods to American producers would ,o out of business, forcin, American producers to find hi,her-cost suppliers. 'urthermore, as outlined above, ti,hter credit conditions can prevent American companies from investin, in capital and labor, thereby slowin, their ,rowth. Fe,ative supply shocks can create a recession in the short run. @f a severe European crisis emer,es, Americans should expect a U.(. recession !ne,ative 3IM ,rowth" as well. A maAor crisis in Europe would cause European producers to fail and spark a sharp drop in European imports from the rest of the world. @n particular, a breakup of the euroDone would disrupt trade within Europe because businesses would need to adAust to a new money re,ime on the fly. Jany would likely adAust by contractin,, specifically by closin, plants in countries that lost stability or competitiveness in the crisis. (upply chains in many industries are thorou,hly ,lobaliDed. American producers rely on particular suppliers to make specialiDed parts. 5ikewise, many American manufacturers make parts that end up in final ,oods produced in Europe. 'or instance, !he Economist recently reported that <8 percent of the value of each airplane built by Airbus ori,inates in the U.(. @f European firms fail or contract, their American suppliers and producers will suffer. The U.(. exported N746 billion to the EU in 78)), amountin, to ).6 percent of U.(. 3IM, and imported a similar amount. Juch of that trade is in intermediate ,oods and between companies. Iisruptin, these links would slow production at some U.(. firms and lead to plant closures. Bowever, the worst supply effects are those felt in the lon, run. $orldwide technolo,ical innovation and increasin, efficiency drive material improvement in modern life. @f Europe experiences an extended depression, many of its entrepreneurs, inventors, and innovators will fall idle. As bad as the current trou,h is, the lost potential of the past few years pales in comparison with the potential that will be lost if Europe remains on its current, uninspirin, ,rowth path.

(ince the )*98s, Europe has offered a clinic in bad economic policy. Iecreased labor freedom and an expandin, welfare state ended Europeans& postwar conver,ence with U.(. livin, standards. @nstead, Europe settled into a below-potential ,rowth path, well behind the U.(. Unemployment rose and labor force participation sta,nated, deprivin, the world of the economic contributions of many Europeans. Continuin, the rotten policies of the past into a severe crisis would make them even more destructive. Iurin, times of economic transition, market inflexibility will keep more people out of work lon,er and reward companies with political connections instead of companies with efficient innovations. 'uture American consumers would be poorer in a world with less European innovation. 0o"itica" Action or Inaction. $ithout far-reachin, liberaliDation, Europe&s economies cannot ,row and thrive. The anti-competitive restrictions in most European economies will prevent rapid ,rowth re,ardless of the euro&s fate. Euro E1it/ The most obvious potential political action would be the breakup of the euroDone. This may occur in many different ways, most likely leavin, behind a core of $estern European countries that continue to use the currency. @n some versions, the weakest economies and most troubled ,overnments will drop out or be kicked outL first 3reece, then others from amon, @reland, @taly, Mortu,al, and (pain. @n other versions, the most competitive economies !3ermany and 'inland" Aump ship, and the remainder try to muddle throu,h to,ether, possibly failin, and splinterin, further. @t is not known how sharp a crisis would be caused by a country&s leavin, the euro. !(ee text box, GBow a European -ecession Could Affect U.(. 3rowthL @B( 3lobal @nsi,ht 'orecast.H" An orderly exit mi,ht look most like currency revaluations, as when 3reece replaced the second modern drachma with the third modern drachma in )*+<, exchan,in, ),888 old drachmae for one new drachma. (uch a transition is an inconvenience but not a catastrophe. -e,rettably, that is a best-case scenario. -evaluations usually occur when the ,overnment wants to close the door on an era of inflation, and people expect stability. Bowever, an exit from the euro would likely be much messier for two reasons.

$irst, residents may expect less stability outside the euro, not more stability. Second, residents will initially want to hold on to their euros and may eschew the unproven currency. 3reeks have already withdrawn millions of euros from 3reek banks, preferrin, to hold cash or invest in forei,n banks, where there is no risk of havin, their savin,s forcibly converted into drachmae and less risk of bank failure. Anders Rslund compares a potential breakup of the euro with the messy breakup of the ruble Done and the divorce of the CDech and (lovak koruna in )**7. 5ar,e devaluations have followed currency breakups, both from inflation and from currency runs. @n neither case does Rslund find evidence that the devaluation helps to alleviate underlyin, economic weakness, as some have su,,ested. $hile euroDone members may find it desirable or necessary to exit, only fundamental reform, not currency manipulation, can solve the underlyin, problems. *ncertain 0o"itics/ Bow European voters will respond to economic distress remains to be seen. @n recent 3reek elections, communist and neofascist parties to,ether won more than )) percent of the vote. (S-@TA, a hard-line socialist coalition, vaulted from obscurity to become the second-lar,est party in 3reece with 79 percent of the vote. European voters are not immune to votin, for destructive political leaders, and European leaders are not immune to makin, decisions that harm themselves and their allies. @f Europe suffers a steep economic decline, everythin, is in play. (ome countries mi,ht abandon FAT0, Eastern European countries could elect -ussian-oriented leaders, or anti-immi,rant parties mi,ht close borders and further curtail reli,ious freedom. Countries that leave the euro for valid reasons mi,ht later hyperinflate their currencies to perpetuate hi,h ,overnment spendin,. @nstead of cuttin, subsidies and freein, trade, European leaders could increase subsidies to politically important industries and raise barriers to trade. Any of these actions would harm U.(. interests and diminish European stability. Inaction on Reform/ A country with sound policies can ride out a crisis. 'or example, Estonia sustained a massive drop in 3IM in 788* and bounced back to stron, ,rowth, reelectin, the ,overnment in the process. Bowever, most European

countries lack competitive policies and instead hamper businesses and workers with myriad restrictions. !he %all Street &ournal&s tour of @taly&s restrictions on startin, and ,rowin, a business illustrates the anti-competitive, anti-,rowth re,ulations that pla,ue European labor markets. @n addition to labor ri,idities, restrictions like Donin, codes, environmental re,ulations, and a,ricultural subsidies conspire to reduce investment and raise prices. Europeans have access to the same technolo,ies as Americans, but they produce only 9) percent as much output per personPthe same as in the )*68s. $ith mountin, debt and a,in, populations, Europeans can no lon,er afford to delay reform. As explained in The Berita,e 'oundation&s primer on soverei,n debt, economic ,rowth is the only way to escape debts of this scale. Europe needs ,rowth, but its current policies are preventin, it. 0o"icy Conc"usions @n the lon, run, both the United (tates and Europe need flexible and competitive policies that free people to pursue their ambitions. */+/ 0o"icies/ The U.(. can best help Europe by pursuin, sound economic policies at home. 'or 78)7, this means pullin, back from the fiscal cliff by makin, the 788) and 7882 tax cuts permanent. 0ver the next few years, it means reformin, entitlements to preserve Jedicare and (ocial (ecurity for the next ,eneration. ;ust as a stron, European economy lifts the United (tates, a stron, U.(. economy lifts Europe. The U.(. ,overnment should encoura,e Europe&s leaders to pursue lon,-run strate,ies that will instill confidence. The 0bama Administration has actively worked a,ainst the best interests of Europeans and Americans by encoura,in, European leaders to spend money on discredited short-term Qeynesian stimulus. @nstead, U.(. leaders should hi,hli,ht the successful American experience with welfare reform and push for trade deals to eliminate costly a,ricultural and industrial subsidies on both sides of the Atlantic. Reforms in Europe/ European leaders are focused on buildin, a brid,e to the other side of the on,oin, crisis. This is a mistake. As bad as the present situation is, the lon,-term prospects for European ,rowth are even worse. $ithout a foundation for

lon,-run ,rowth on the other side, no brid,e will deliver Europe safely across its current troubles. The policies that foster lon,-run ,rowth are well known. Even the European Commission&s own economists understand that improvin, lon,-run ,rowth will re.uire structural reform. Althou,h the details differ from place to place, leaders in each European country shouldL

Cut taxes and ,overnment spendin,= End welfare as Europeans know it= +top re(u"atin( workplaces so harshly that )8 percent to 28 percent of the economy ,oes under,round= 0romote competition instead of coddlin, iconic corporations= A""o, employers to fire workers so that they can risk hirin, youn, and inexperienced workers= 'i era"i6e Donin, restrictions in cities, where the hi,h cost of rent pushes workers away from the most productive locations and discoura,es childbearin,= Encoura(e immi,ration of skilled workers= and End a,ricultural subsidies and trade barriers.

'ree people workin, in free markets are the only path to lon,-term ,rowth and prosperity. @f Europe can implement the ri,ht policies for the lon, run, the short run will look a lot shorter and more mana,eable.

The European debt crisis is the shorthand term for Europe&s stru,,le to pay the debts it has built up in recent decades. 'ive of the re,ion&s countries / 3reece, Mortu,al, @reland, @taly, and (pain / have, to varyin, de,rees, failed to ,enerate enou,h economic ,rowth to make their ability to pay back bondholders the ,uarantee it was intended to be. Althou,h these five were seen as bein, the countries in immediate dan,er of a possible default, the crisis has far-reachin, conse.uences that extend beyond their borders to the world as a whole. @n fact, the head of the ank of En,land

referred to it as Gthe most serious financial crisis at least since the )*28s, if not ever,H in 0ctober 78)). This is one of most important problems facin, the world economy, but it is also one of the hardest to understand. elow is a 1UA to help familiariDe you with the basics of this critical issue. 7: Ho, did t!e crisis e(in. The ,lobal economy has experienced slow ,rowth since the U.(. financial crisis of 7886-788*, which has exposed the unsustainable fiscal policies of countries in Europe and around the ,lobe. 3reece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker ,rowth. $hen ,rowth slows, so do tax revenues / makin, hi,h bud,et deficits unsustainable. The result was that the new Mrime Jinister 3eor,e Mapandreou, in late 788*, was forced to announce that previous ,overnments had failed to reveal the siDe of the nation&s deficits. @n truth, 3reece&s debts were so lar,e that they actually exceed the siDe of the nation&s entire economy, and the country could no lon,er hide the problem. @nvestors responded by demandin, hi,her yields on 3reece&s bonds, which raised the cost of the country&s debt burden and necessitated a series of bailouts by the European Union and European Central ank !EC ". The markets also be,an drivin, up bond yields in the other heavily indebted countries in the re,ion, anticipatin, problems similar to what occurred in 3reece. 'earn more a out t!e current e2ents affectin( ond market performance 7: &!y do onds yie"ds (o up in response to t!is type of crisis3 and ,!at are t!e imp"ications. The reason for risin, bond yields is simpleL if investors see hi,her risk associated with investin, in a country&s bonds, they will re.uire a hi,her return to compensate them

for that risk. This be,ins a vicious cycleL the demand for hi,her yields e.uates to hi,her borrowin, costs for the country in crisis, which leads to further fiscal strain, promptin, investors to demand even hi,her yields, and so on. A ,eneral loss of investor confidence typically causes the sellin, to affect not Aust the country in .uestion, but also other countries with similarly weak finances / an effect typically referred to as Gconta,ion.H 7: &!at did European (o2ernments do a out t!e crisis. The European Union has taken action, but it has moved slowly since it re.uires the consent of all nations in the union. The primary course of action thus far has been a series of bailouts for Europe&s troubled economies. @n sprin,, 78)8, when the European Union and @nternational Jonetary 'und disbursed ))8 billion euros !the e.uivalent of N)42 billion" to 3reece. 3reece re.uired a second bailout in mid-78)), this time worth about N)+9 billion. 0n Jarch *, 78)7, 3reece and its creditors a,reed to a debt restructurin, that set the sta,e for another round of bailout funds. @reland and Mortu,al also received bailouts, in Fovember 78)8 and Jay 78)), respectively. The EuroDone member states also created the European 'inancial (tability 'acility !E'('" to provide emer,ency lendin, to countries in financial difficulty. The European Central ank also has become involved. The EC announced a plan, in Au,ust 78)), to purchase ,overnment bonds if necessary in order to keep yields from spiralin, to a level that countries such as @taly and (pain could no lon,er afford. @n Iecember 78)), the EC made O<6* !N42* billion" in credit available to the re,ion&s troubled banks at ultra-low rates, then followed with a second round in 'ebruary 78)7. The name for this pro,ram was the 5on, Term -efinancin, 0peration, or 5T-0. Fumerous financial instituions had debt comin, due in 78)7, causin, them to hold on to their reserves rather than extend loans. (lower loan ,rowth, in turn, could wei,h on economic ,rowth and make the crisis worse. As a result, the EC sou,ht to boost the banksK balance sheets to help forestall this potential issue.

Althou,h the actions by European policy makers usually helped stabiliDe the financial markets in the short term, they were widely criticiDed as merely Gkickin, the can down the road,H or postponin, a true solution to a later date. @n addition, a lar,er issue loomedL while smaller countries such as 3reece are small enou,h to be rescued by the European Central ank, @taly and (pain are too bi, to be saved. The perilous state of the countries& fiscal health was therefore a key issue for the markets at various points in 78)8, 78)), and 78)7. @n 78)7, the crisis reached a turnin, point when European Central Jario Ira,hi announced that the EC ank Mresident

would do #whatever it takes# to keep the

euroDone to,ether. Jarkets around the world immediately rallied on the news, and yields in the troubled European countries fell sharply durin, the second half of the year. !Qeep in mind, prices and yields move in opposite directions." $hile Ira,hiKs statement didnKt solve the problem, it made investors more comfortable buyin, bonds of the re,ionKs smaller nations. 5ower yields, in turn, have bou,ht time for the hi,hdebt countries to address their broader issues. 7: &!y is defau"t suc! a ma8or pro "em. Cou"dn-t a country 8ust ,a"k a,ay from its de ts and start fres!. Unfortunately, the solution isn&t that simple for one critical reasonL European banks remain one of the lar,est holders of re,ion&s ,overnment debt, althou,h they reduced their positions throu,hout the second half of 78)). anks are re.uired to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. @f a country defaults on its debt, the value of its bonds will plun,e. 'or banks, this could mean a sharp reduction in the amount of assets on their balance sheet / and possible insolvency. Iue to the ,rowin, interconnectedness of the ,lobal financial system, a bank failure doesn&t happen in a vacuum. @nstead, there is the possibility that a series of bank failures will spiral into a more destructive Gconta,ionH or Gdomino effect.H

The best example of this is the U.(. financial crisis, when a series of collapses by smaller financial institutions ultimately led to the failure of 5ehman rothers and the ,overnment bailouts or forced takeovers of many others. (ince European ,overnments are already stru,,lin, with their finances, there is less latitude for ,overnment backstoppin, of this crisis compared to the one that hit the United (tates. 7: Ho, !as t!e European de t crisis affected t!e financia" markets. The possibility of a conta,ion has made the European debt crisis a key focal point for the world financial markets in the 78)8-78)7 period. $ith the market turmoil of 7886 and 788* in fairly recent memory, investors& reaction to any bad news out of Europe was swiftL sell anythin, risky, and buy the ,overnment bonds of the lar,est, most financially sound countries. Typically, European bank stocks / and the European markets as a whole / performed much worse than their ,lobal counterparts durin, the times when the crisis was on center sta,e. The bond markets of the affected nations also performed poorly, as risin, yields means that prices are fallin,. At the same time, yields on U.(. Treasuries fell to historically low levels in a reflection of investors& #fli,ht to safety.# 0nce Ira,hi announced the EC Ks commitment to preservin, the euroDone, markets rallied worldwide. @n fact, the second half of 78)7 brou,ht none of the crisis-related disruptions that had characteriDed the prior two years. 7: &!at ,ere t!e po"itica" issues in2o"2ed. The political implications of the crisis were enormous. @n the affected nations, the push toward austerity / or cuttin, expenses to reduce the ,ap between revenues and outlays / led to public protests in 3reece and (pain and in the removal of the party in power in both @taly and Mortu,al. 0n the national level, the crisis led to tensions between the fiscally sound countries, such as 3ermany, and the hi,her-debt countries such as 3reece. 3ermany pushed for 3reece and other affected countries to reform the bud,ets as a condition of providin, aid, leadin, to elevated tensions within the

European Union. After a ,reat deal of debate, 3reece ultimately a,reed to cut spendin, and raise taxes. Bowever, an important obstacle to addressin, the crisis was 3ermany&s unwillin,ness to a,ree to a re,ion-wide solution since it would have to foot a disproportionate percenta,e of the bill. The tension created the possibility that one or more European countries would eventually abandon the euro !the re,ion&s common currency". 0n one hand, leavin, the euro would allow a country to pursue its own independent policy rather than bein, subAect to the common policy for the )9 nations usin, the currency. ut on the other, it would be an event of unprecedented ma,nitude for the ,lobal economy and financial markets. This concern contributed to periodic weakness in the euro relative to other maAor ,lobal currencies durin, the crisis period. 7: Is fisca" austerity t!e ans,er. Fot necessarily. 3ermany&s push for austerity !hi,her taxes and lower spendin," measures in the re,ion&s smaller nations was problematic in that reduced ,overnment spendin, can lead to slower ,rowth, which means lower tax revenues for countries to pay their bills. @n turn, this made it more difficult for the hi,h-debt nations to di, themselves out. The prospect of lower ,overnment spendin, led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis. @n addition, the entire re,ion slipped into a recession durin, 78)7 due in part to these measures and the overall loss of confidence amon, businesses and investors. 7: 4rom a roader perspecti2e3 does t!is matter to t!e *nited +tates. Ses / The world financial system is fully connected now / meanin, a problem for 3reece, or another smaller European country, is a problem for all of us. The European debt crisis not only affects our financial markets, but also the U.(. ,overnment bud,et. 'orty percent of the @nternational Jonetary 'und&s !@J'" capital comes from the United (tates, so if the @J' has to commit too much cash to bailout initiatives,

U.(. taxpayers will eventually have to foot the bill. @n addition, the U.(. debt is ,rowin, steadily lar,er / meanin, that the events in 3reece and the rest of Europe are a potential warnin, si,n for U.(. policymakers. &!at is t!e out"ook for t!e crisis. $hile the possibility of a default or an exit of one of the euroDone countries is much lower now than it was early in 78)), the fundamental problem in the re,ion !hi,h ,overnment debt" remains in place. As a result, the chance of a further economic shock to the re,ion - and the world economy as a whole - is still a possibility and will likely remain so for several years, despite the financial-market rallies that characteriDed the second half of 78)7.