Source: Voice of America
Though the crisis in Europe is not expected to be as devastating as the financial crisis in 2008, Uri Dadush explains that it will likely last longer. Europe’s problems “cannot be dealt with very quickly. You need to correct not just the government debt problems and the fiscal problems which are the result of very deep recessions, but you also have to do something about making these economies more competitive.” The dissolution of the Euro area is unlikely, but it is conceivable that one or two countries, including Greece, could decide to leave the Euro area in order to facilitate the adjustments needed to resolve the crisis.
Dadush also notes that the crisis is not confined to Europe. Problems in the Euro area, one of the world’s largest export markets, will impact economies around the world. Major trading partners, including the United States and China, will lose competitiveness relative to Europe as the value of the euro falls. For the United States, however, the biggest risk from the Euro crisis comes through financial channels. If the crisis intensifies, European banks would be hit with big losses that could cause credit markets to tighten again.