Could the Financial System Soon Collapse?

As American and European stocks continue to fall, a financial collapse may be looming. If the ongoing debt crisis forces European countries to default on their debt or abandon the euro, the consequences will have a major impact throughout the world. Many signs point to a worsening economic situation in Europe.

With radical leftists leading in some polls, Greece could become the first country to reject austerity measures and default on its debt. CBS News reported in mid-May that Greek citizens had withdrawn so much money from their accounts that many of the nation’s banks were on the brink of collapse. However, Greece is not the only country at risk.

Spain’s economy also continues to weaken. BusinessWeek reported in late April that the country’s unemployment rate was at an 18-year high of 24 percent. Economist Harry Dent recently appeared on CNBC television and predicted that Spain would default on its debt. He estimated that this would cause the value of American stocks to fall by 10 to 20 percent.

Unemployment and austerity measures also reduce Europe’s consumption of foreign goods, especially high-end items manufactured in North America and Japan. Nearly one-quarter of U.S. exports went to European countries in 2010, according to The Washington Post. The combined loss of European investment, exports and bonds would have a sizable impact.

The effects of the European debt crisis are not confined to the Western Hemisphere. The World Bank warned on Wednesday that economic conditions in Europe and the U.S. may limit growth in eastern Asia, according to ABC News. Chinese factory production already fell to the lowest level in four years during April.

A day earlier, the Organization for Economic Cooperation and Development issued a report on the global economy. It cautioned that the European financial crisis might “derail” economic recovery in other parts of the world. Such trends can result in a chain reaction of unpaid debts and encourage unsustainable government spending.

The U.S. is not immune to the consequences of excessive borrowing. The national debt recently surpassed $15.7 trillion, and political leaders have yet to address the issue in a comprehensive manner. Canada, Australia and several other countries also face heavy debt burdens that could eventually lead to new financial crises.

It will be interesting to see what happens…