With Italy's credit downgrade Tuesday, Europe's debt crisis only deepens. The United States is pressuring Europe more forcefully than ever to find ways to stimulate growth in the euro-zone. But so far the Europeans remain focused on cutting spending. Now lots of other experts are chiming in, offering solutions ranging from euro-bonds to a wholesale Chinese bail-out. The debate might seem a bit abstract at times, but a healthy Europe is key to United States' own stability.
Taken as a whole, the 17-member eurozone is the second largest economy in the world. And the euro currency, the second most traded after the U.S. dollar. Domenico Lombardi, a senior fellow at the Brookings Institution in Washington, said Americans should be as worried as Europeans are about the continent's debt crisis.
"The euro area is an important market for U.S. exports," he said. "And so a flagging economy in Europe means less exports and less jobs."
He also said he thinks a eurozone meltdown would hit US banks hard because of their exposure to the European market.
Lombardi testifies September 22 before a U.S. Senate finance subcommittee. He will tell lawmakers that the U.S. must keep up the pressure on Europe to focus less on austerity measures and more on investing for growth.
The U.S. has been pushing that message with Europe. Just last week U.S. Treasury Secretary Timothy Geitner was in Poland, at a meeting of European finance ministers. But European leaders paid him little heed. Javier Diaz-Gimenez, who is an economist at Spain's IESE business school, said that was a mistake.
"There's no doubt that any austerity measures, tax hikes, they reduce growth," Diaz-Gimenez said.
Without growth, he said, getting out of debt will prove impossible for Greece, and maybe other euro nations. Nevertheless, European leaders have gone the other way, demanding severe spending cuts from indebted members in return for rescue funds. It's what voters — in countries like Germany — are demanding. But it is also what protestors in Greece and elsewhere are strongly objecting to.
In the midst of this apparent impasse, some analysts are suggesting that the money to stabilize European debt should come from outside Europe, perhaps channeled through the IMF. Brazil has offered to help. China, which holds some $3 trillion in reserves, is already negotiating the purchase of some public debt. But any deal would likely come with strings attached. For example, China has hinted that Europe would have to drop some protective tariffs on cheap Chinese goods. That would be another tough sell among European voters.
In Spain, there is already popular resistance to what many see as an invasion of Chinese businesses in recent years. In Barcelona, Fransec Carbo sells Iberian ham in a downtown shop.
"If all tariffs are removed," he said, "and the Chinese start importing anything and everything into Europe, we'll all have to close our doors. In the end they're going to swallow us whole."
Carbo told a reporter to look at the corner bars in his neighborhood, pointing out that the menus are in Spanish, but that the owners are now Chinese.
Across the street, bar owner Rafaela said she works 16 hour days at her little joint, just to pay her rent.
"I don't know how the Chinese do it," she said. "If I charge a buck fifty for a cup of coffee, they sell it for a buck thirty-five."
Chinese owned businesses in Europe are not the same thing as China officially gobbling up billions in European debt. But more Chinese stores and goods may be one price Europe is forced to pay if its market conditions scare off other investors.