The End Of Europe

Britain is burning. Strange that it should be so. After all, the catastrophic economic news of recent days, including the highly controversial downgrading of U.S. debt by Standard & Poor's, the burgeoning euro crisis in continental Europe and the market turmoil that followed both, has been made in New York City, Brussels and Berlin, not in the streets of North London. But if you look closer, it all makes sense. Britain, like the U.S., has been a center of both great wealth creation and a widening wealth divide over the past 20 years, thanks to the rise and, more recently, fall of the markets and global economic growth.

Now the U.K. is sharing the suffering of the rest of Europe — namely, deep budget cuts that are hurting vulnerable populations the most. As youth programs, education subsidies and housing allowances are axed by a state desperate to get out from under crushing sovereign debt, it's clear why the poorest populations in the most economically unequal large European nation are taking to the streets.

The only surprising thing is that it didn't happen sooner. We've known since the beginning of the financial crisis and subsequent economic downturn that the world order was changing in profound ways. But we've tried to wish it all away with talk of temporary blips and cyclical recessions. We've come up with every possible excuse, from tsunamis to a lack of market certainty, to explain why rich-country economies aren't rebounding.

But the past two weeks of dismal economic news have made the new reality impossible to ignore: the West — and most immediately Europe — is in serious trouble. This is no blip but a crisis of the old order, a phrase once used by historian Arthur Schlesinger Jr. to describe the failures of capitalism in the 1920s. It is a crisis that is shaking not only markets, jobs and national growth prospects but an entire way of thinking about how the world works — in this case, the assumption that life gets better and opportunities richer for each successive generation in the West.

As bad as things might seem in the U.S., the smoldering center of the crisis is Europe. Volatile continental markets and angry demonstrations from Athens to Madrid are manifestations of the desperate scramble by European politicians to contain the euro-zone debt crisis that threatens to unravel the single currency and destabilize the region. The European Union and the euro zone were supposed to bring about economic stability and remove traditional barriers to growth, such as tariffs and regulations. Instead it's become a selfish union in which flailing economies feed rising nationalism, angst over immigration and simmering distrust between rich and less affluent countries. "Europe is at the center of the global financial problems," wrote Michael Hartnett, chief global equity strategist for Bank of America Merrill Lynch, in a recent note to investors. "Those problems have been exacerbated by the inability, or the unwillingness, of policymakers ... to address the debt issues."

Why the Euro Is Everyone's Problem

While the crisis may seem to be Europe's problem, if it results in a breakup of the euro zone or even a growth-dampening series of costly bailouts, it will reverberate from Beijing to Boston and back. Europe is the largest trading partner of both the U.S. and China. It's home to one of the world's largest pools of wealthy consumers. If they stop buying our stuff, everyone suffers. Meanwhile, a dramatic depreciation of the euro or a dissolution of the union would make nations from Asia to Latin America that hold the euro as a reserve currency much weaker. Even the mere effort to contain the crisis with looser monetary policy on either side of the Atlantic creates a risk of inflation and hot money that could punish emerging markets, economists like Goldman Sachs' Jim O'Neill have warned.