Wednesday, November 16, 2011

All Eyes on Europe

There has been some reasonably good news about the US economy in recent weeks (for example, higher retail sales, increased industrial production, and fewer new claims for unemployment), but all eyes are on Europe.  Economists generally think much of the eurozone is or soon will be in recession. The size of the impact depends on how deep a recession takes place.  Economists at Wells Fargo have released a study examining the exposure of each state to the European economy.  More importantly, the debt crisis is beginning to spread, resulting in higher risk premiums for virtually the entire eurozone other than Germany.  MoneyWeek, a financial magazine based in the UK, provides nice charts of bond yields on European sovereign debt, updated several times day.  Not only have bond yields risen for the "hish-risk" countries (Greece and Portugal), but Italy and Spain have seen significant increases and now France is experiencing a spike in the spread of its bond yields relative to Germany, reflecting significant increases in perceived risk (see chart from Bloomberg below): 


The contagion is spreading.  High debt, weak economic growth, and rising yields are a lethal combination for an economy.  There's many more difficult decisions to make and much more pain to come in Europe and possibly elsewhere.