Europe’s debt crisis and the US
James Pethokoukis reminds us that if we’re not watching the European debt crisis, we should. The one thing Tim Geithner apparently got right was how it could effect the US negatively. Geithner said:
Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.
And that’s the obvious truth. If you need to catch up, here’s an article in the Financial Times to bring you up to date (you may need to sign up or register to read it).
Pethokoukis then points to a report from Barclays Capital that details what Geithner was talking about:
Our baseline forecast assumes that policymakers will prevent the turmoil in Europe from leading to a full-blown financial crisis similar to 2008 and that US policymakers will not impose excessive fiscal tightening starting in 2012. If, by contrast, either of these risks is realized, the potential for another recession will increase substantially. We use the Fed’s stress scenario under the Comprehensive Capital Analysis and Review (CCAR) as an alternative scenario to our baseline, but ratchet up the intensity modestly and analyze its effect on the outlook for house prices.
1) Our modeling suggests that in a recession scenario, house prices, as measured by the CoreLogic headline index, could decline another 7% in 2012 . … The scenario posits declining real GDP for four consecutive quarters, with Q2 12 having the deepest decline at 6% (q/q saar).
2) Real disposable personal income also declines for four consecutive quarters, albeit with a one-quarter lag relative to the decline in GDP, and the unemployment rate moves persistently higher, peaking at 12.1% by the end of our forecast horizon. …
3) Furthermore, the rising unemployment rate suggests that delinquencies would push shadow inventory higher, putting downward pressure on distressed home prices. Together, the two effects send home prices significantly lower in 2012.
Or in simple terms, if Europe goes, so does the US. Housing down another 7% and unemployment up into the 12% area.
Obviously this is all based on modeling and plugging in various numbers. So just as obviously those numbers could be off a bit. However, the basic premise is correct. If Europe can’t solve its debt crisis, the US will also suffer and, as you can see, suffer mightily (check out the chart at the link).
I think the political implications are clear even for the most partisan among us.