With all the brouhaha surrounding the billions of dollars being used to "rescue" American financial institutions and businesses, the projected federal government budget deficit is set to reach $1.9 trillion this year. It's hard to remember there is a global economy beyond our borders.
The International Monetary Fund predicts the global economy will shrink between 1 percent and -0.5 percent this year, the first global contraction in more than 60 years. The largest economies of the U.S., the Euro area and Japan are forecast to shrink by about 2.6 percent, 3.2 percent and 5.8 percent, respectively.
Though the U.S. may fare less poorly than the rest of the world, this is hardly good news.
Now, we should shift our attention to the European Un-ion, our largest trading partner. It could be said that while the seeds of the financial crisis were sown in the U.S., they first sprouted in Europe.
It began in Iceland. To attract foreign currencies, Icelandic banks began offering high interest rates. People in the United Kingdom were particularly happy with this arrangement. Unfortunately, the Icelanders weren't as adept at finance as many thought. The bubble popped and the U.K. was forced to rescue its citizens who sent their savings abroad. The British bank Northern Rock was nationalized.
In France, BNP Paribas admitted it didn't know the true value of its U.S. mortgage-backed asset holdings. And the floodgates opened into what is now the subprime mess.
But there's another potential European bank crisis around the corner: Eastern Europe. And like all financial crises, we don't have to look back too far to find an antecedent - the 1980s Latin American debt crisis.
In the '70s and early '80s, many Latin American countries relaxed trade restrictions and liberalized capital markets. At the same time, there was a euphoric attitude about these countries in the U.S. and large banks loaned billions of dollars to these countries.
A similar situation exists in Eastern Europe. Market liberalization has led to an explosion of foreign investment in these countries, which could now default on foreign loans.
These countries borrowed primarily in euros, and these debts must be paid. The foreign debt-to-gross domestic product ratio is about 40 percent. While the absolute numbers aren't that large (trillion is the new billion), the threat of loan default may be destructive to larger European commercial banks in Austria, Sweden and Italy.
Austrian banks have 80 percent of their assets in Eastern Europe, and if these collapse it could bring down the Austrian banking system with it. Austria, however, is a small country with little means to rescue a bank system. Maybe the IMF will have to ride to the rescue, again, as there are few alternatives.
There are cries from several corners that the current crisis may lead to the dismantling of the European economic experiment (including World Bank president Robert Zoellick) and, worse, maybe civil war in the Balkans.
I, for one, would not be surprised if the euro ceases to exist when all is said and done.
email@example.comRobert "Tino" Sonora is an assistant professor of economics and co-director of the Office of Economic Analysis and Business Research at Fort Lewis College.