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Eurozone breakup inevitable and tanks the economy

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Eurozone breakup inevitable and tanks the economy

Kavoussi 11-28a business reporter at The Huffington Post,. She has written for The Boston Globe, The New York Observer, and The San Antonio Express-News., she is a recent graduate of Harvard University, where she studied international economic history and the history of economic thought (Bonnie, “Eurozone Crisis Threatens Global Economy” http://www.huffingtonpost.com/2011/11/28/eurozone-crisis_n_1116977.html) Jacome
As a breakup of the eurozone -- a once seemingly impossible scenario -- becomes increasingly likely, economists are starting to sketch out what a post-euro world would look like. Many are warning that if political leaders don't change course, a breakup of the eurozone would plunge the United States and the rest of the world into a slowdown and possibly another recession.

"If Europe turns out badly, it's much more likely we'll go into recession," said Michael Spence, a Nobel Prize-winning economist at the New York University Stern School of Business. "If you take a big chunk like Europe and turn it down, it would probably bring everybody else down, including us."

If the eurozone dissolves, the European banking system would likely collapse, economists said, plunging the continent into recession, which would keep European consumers from buying. Decreased demand from the continent, which represents about 20 percent of the global economy, would hurt both the United States and emerging countries, who depend on European banks not just for demand, but also for funding.

The risk of a eurozone breakup has increased dramatically over the past couple of weeks, as countries have faced increasing difficulty selling their debt. Interest rates on sovereign bonds issued by eurozone countries have spiked. The interest rate on 10-year Italian sovereign bonds rose to 7.28 percent Monday, nearly hitting a Nov. 9 euro-era high that was only eased afterward by limited bond purchases by the European Central Bank.

The interest rate on 10-year Spanish sovereign bonds rose to 6.58 percent Monday, near the euro-era high reached on Nov. 17. Interest rates on the 10-year bonds of more fiscally sound countries, such as France and Belgium, spiked to 3.58 percent and 5.59 percent respectively on Monday, as the contagion of higher borrowing costs spread to across the eurozone, regardless of their economic fundamentals.

If European leaders don't agree to take bold economic measures for more fiscal integration -- including allowing the European Central Bank to become the lender of last resort -- the eurozone could start to unravel, said Simon Tilford, chief economist of the Center for European Reform in London.

The eurozone's future could be decided next week when leaders meet for a summit on the sovereign debt crisis on December 9. If they leave empty-handed, Tilford said, fearful depositors could pull their money out of European banks en masse, causing European banks to fail. In a "vicious death spiral," said Tilford, troubled European countries would stop being able to borrow money as borrowing costs reach unsustainable levels. Then a string of European countries could default and leave the eurozone, leading to its collapse, he said.

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