Why Europe Matters
The deficit debate swirling in Washington is purely a domestic discussion, as if the nation’s budgetary woes existed in splendid isolation from the rest of the world.
Republicans unwilling to entertain tax in- creases and Democrats who reject spending cuts are all implicitly assuming that they can wait for U.S. domestic growth to bounce back and work its magic on the deficit. In their bud- get posturing, developments elsewhere in the world are a side issue.
So when European leaders announced a $112 billion bailout of Ireland last week, only to watch bond markets start panicking about whether Spain and Portugal might be the next dominoes to fall, it was hardly a surprise that neither President Obama nor congressional leaders even seemed to notice the tremors across the Atlantic.
But that indifference could be a mistake. Today’s battered, debt-laden, and globalized U.S. economy is more vulnerable to exter- nal shocks than ever before. Indeed, lagging exports to Europe, the biggest purchaser of American goods after Canada, is one reason for the slowdown in the nation’s economic growth this year. If Europe’s financial un- raveling continues to accelerate, Washington policymakers may find themselves hostage next year to events outside their control.
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