Will America Catch the Eurovirus?

Salim Furth / John Ligon /

In a new Backgrounder, “How Contagious Is Europe’s Economic Crisis?”, we discuss several channels through which a European crisis could be transmitted to the U.S. economy and note the key policy responses needed in the U.S. and in Europe.

How can the U.S. help Europe get out of recession and into recovery? Primarily, the U.S. should remain a strong economic partner to Europe by avoiding the fiscal cliff or a debt crisis at home. As German Finance Minister Wolfgang Schaeuble said last Tuesday, global risks grow as U.S. policymakers prove unable or unwilling to control budget deficits. The fiscal cliff, if left unaddressed, would pitch the U.S. into a recession in 2013, leading to higher spending, lower tax revenues, and undermine deficit-reduction efforts.

Policymakers in both the U.S. and Europe need to make plans for the long run by cutting spending, reforming tax codes and entitlements, and liberalizing labor markets. The various short-run schemes proposed in Europe are guaranteed to fail if debt perpetually grows faster than GDP.