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The economists expect the European economy to shrink 0.5 percent in 2011
-- and fall into a recession. Europe is slowing as heavily indebted countries slash spending and banks exposed to government debt curtail lending. Among the gravest fears is that a major country like Italy will default on its debt, wiping out some banks with large holdings of European government bonds. A worldwide credit crunch like the one that followed the 2008 failure of Lehman Bros could follow. Twenty-one of the economists listed Europe as a threat to the U.S. economy next year. "If it were a big enough downturn, given the size of Europe, it could bring the world economy down into recession," says Allen Sinai, president of Decision Economics. But overall, the economists see only an 18 percent chance that Europe's debt troubles will cause a recession in the United States. The economists are divided over which one step European policymakers should take now to bolster the 17-country eurozone. More than one-fourth say the European Central Bank should aggressively try to lower the borrowing costs of the Italian and Spanish governments by buying their bonds. Nearly one-fifth say European countries should jointly issue "Eurobonds" to help finance weaker countries. And 17 percent say European governments should slash spending. Still, the economists expect European policymakers to find a way to prevent the crisis from escalating into a global financial panic. If Europe can stabilize its economies, the U.S. stock markets would rally sharply, economists say, and prospects for U.S. economic growth would brighten. "Europe appears to be the only real impediment to keeping this recovery from happening," said Joel Naroff, president of Naroff Economics.
[Associated
Press;
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