If there were an official anthem for the European debt crisis, it would be Lady Gaga's "Bad Romance," and not just because the pop star croons a few lines in French and chants the name of a continental capital. The once slow, now increasingly fast-moving economic disaster unfolding across the Atlantic is best understood as a really, really dysfunctional relationship.
As Harvard economist Ken Rogoff puts it, "Europe is like a couple that wasn't sure they wanted to get married, so instead they decided to just open a joint checking account and see how things went." They went badly. Germany, the thrifty partner, is wringing its hands about how to handle the fact that its Mediterranean lover has drained the account and doesn't want to go on a budget. The southern European attitude is pretty well summed up in Gaga's lyric "I want your everything as long as it's free."
This bad romance will reach a turning point this summer as Europe finally decides whether it wants to break up or get married. But in the meantime, friends and family haven't been immune to the turmoil. The most recent, abysmal U.S. employment figures--about half as many jobs were created as was expected--were explained in part by the fact that big American companies have been hit by weakening growth in the euro zone, since sales there make up a significant chunk of their revenue. And in the U.S., Congress failed to come up with a growth plan after the stimulus money ran out. There's also uncertainty about whether Europe's banking crisis will migrate to American shores. At the same time, the fast-growing emerging markets of China, India and Brazil that have buoyed the global economy over the past couple of years have started slowing down too, which has affected U.S. exports.
These three regions--the U.S., Europe and the emerging markets led by China--make up the legs of the stool that is the global economy. Since the financial crisis of 2008, we've dealt with two broken legs at once (the U.S. and Europe)--but not all three. That has economists very worried, so much so that some are saying there's a serious chance, perhaps as much as 40%, of a double-dip recession in the U.S. by year's end if things don't change. "Left to its own devices, the U.S. economy would continue to exhibit rather anemic growth and low job creation," says Mohamed El-Erian, head of Pimco, the world's largest bond trader. "But the stronger the ill winds [from abroad], the higher the risk of another recession."
Certainly, markets are roiled; the Dow Jones industrial average regurgitated nearly 300 points, and European and Asian indexes plummeted. But within that turmoil, an important fact has gone largely undiscussed: this global slowdown is synchronized in more ways than one. Not only are the fortunes of the world's major markets and economies still very much tied together, but the root cause of their problems is the same: dysfunctional politics.