Europe's Problems Deepen

And they do. The market's reaction this morning is due to the conditions deteriorating in Europe. One piece of particularly disturbing evidence came this morning when financial data firm Markit announced that a major survey it conducts has slipped into contraction territory for the first time since Europe's recession ended in 2009.

And that's not all. One of the most respected investors out there -- PIMCO's Mohamed El-Erian -- wrote a particularly pessimistic opinion piece this morning at the Financial Times. He sees a Europe on the brink of a financial crisis. He notes that short term lending, particularly to French banks, is drying up. This is the sort of bank run-like behavior that led to the financial crisis of 2008. When investors stop providing short-term loans to banks, bad things happen.

How Far Will the Problems Spread?

So Europe's got the U.S. markets spooked. Investors likely assume that if Europe slips into recession, interconnectedness means that the U.S. won't be far behind. While this wouldn't necessarily be the case all the time, it probably would be this time.

Over the past several months the U.S. economy has slowed. Although July was better than June and May, it still wasn't great. In a vacuum, the U.S. might be able to stay on its slow-recovery path. But we don't live in a vacuum. Weakness abroad could push the U.S. economy over the line into recessionary territory -- a line it isn't far away from as it is.

As always, however, we have to see how this situation unfolds. If Europe does experience a financial crisis, then global markets will be in a heap of trouble. If it escapes that fate, however, then there may still be hope for a painfully slow U.S. recovery. That's not much of a best-case scenario.

Image Credit: REUTERS/Brendan McDermid

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