Posted Monday, Feb. 6, 2012, at 9:34 AM
Ezra Klein has consistently emphasized over time the point that the state of the economy this year, and therefore the 2012 election, may well hinge on events in Europe rather than anything in Washington that political reporters are likely to focus on. I think this is a helpful corrective to certain tendencies toward myopia in the press corps, but, as Paul Krugman writes, we shouldn't overstate the extent to which American producers depend on European consumers. One consequence of the United States not being a manufacturing-focused exporting superstar is that the U.S. economy turns out not to be very vulnerable to a decline in European demand. It doesn't help, but it's not that big a deal.
What's interesting is that a few months ago I was incredibly alarmed about Europe dealing a hammer-blow to the American financial system. We turned out to be much more intertwined with the European banking system than one would have thought. But these various deals that European leaders have worked out over the past several months have been a boon to the United States from this perspective. For one thing, they've bought time. European banks haven't collapsed, and American officials, American banks, and American nonfinancial firms have all had time to start thinking through the implications and insulating themselves. That's been an extra source of problems for Europe but it's good for us. The other factor is that while Europe's leaders haven't hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks. This kind of "bankers and rich people first" approach to coping with an emergency is terrible for the average European, but it does take care of our main concern from Europe, which was that we might get hit with a sudden credit crunch.