In the history of financial crises when an accident is waiting to happen, it eventually does, this has been the proved in the past considering the financial crisis.
With stock markets in a state of uncertainty after the latest job number figures were way below the expected estimate, the US economy is not recovering as strongly as some observers have expected. There could however be more bad news on the horizon emanating this time from Europe.
The Euro zone crisis has only been put on hold for a few weeks until Greece can hold another round of elections sheduled today. Last time out, an agreement couldn’t be reached to form a coalition as one of the main parties opposes all austerity measures.
The Syriza party has been gaining support with in Greece. In recent months as its staunch opposition to austerity is an attractive option for many Greeks suffering during the economic downturn. The consequence of Syriza gaining power though would be far-reaching.
Another bailout by the EU will only be offered to Greece if they implement strict austerity within their budget. Syriza’s refusal to countenance such measures would leave the Euro zone in a very vulnerable state indeed, and would lead most likely to Greece leaving the Euro.
The US has tried to protect itself from such an eventuality by reducing its risk to both Greek and EU financial institutions. The lack of support from the US however means the Euro zone is even more unstable, and if Greece does leave the Euro, the instability in the bond and financial markets could lead to other countries, especially Italy and Spain having even greater problems. Europe’s entangled financial crisis, from debt woes in Greece to banking trouble in Spain and high unemployment all around, has become the single biggest threat to the U.S. economic recovery. The signs of worry are clear at the White House and in the words of Obama, who can draw a straight line from the fate of Europe’s economic strength to his chances of a second term.
This matters to US because Europe is our largest economic trading partner. A Run on the banks in Spain and Italy is a very real possibility without some preventative steps and some economists have recommended that the European Central Bank should implement quantitative easing to help regain some control over a situation.
The bond markets are generally a great indicator of the future and with many seeking shelter away from the likes of Spain, Germany and the USA due to debt worries, bonds are trading at their lowest level for many years.
These concerns compound the already bad economic news of poor job creation and stagnant growth in the US economy. The next few weeks could therefore be a very bumpy ride for everyone.