Recovery Lost: Why the U.S. and Europe Are Back at the Brink

In short, we're stuck in a world of no growth and no options.

Too much debt, too little growth. That's Europe in a nutshell.

WHAT'S THE MATTER WITH EUROPE? DEBT.

Depressed yet? Let's talk about Europe.

There are five countries dragging down the continent, but you should think of them in two categories. Greece, Portugal and Italy are the profligate sloths. Spain and Ireland are the busted housing kings. All five are facing rising interest rates that could require hundreds of billions of dollars in assistance from the continent's healthy economies.

Greece is the Western world's mascot for fiscal failure. Even with $300 billion in bailout relief, the country is all but certain to default on most, or all, of its debts. Portugal and Italy's troubles are similar but smaller in nature: slow growth and high deficits. Other European countries face crises that resemble our recession on elephant steroids. Ireland's real estate bubble once consumed 25% of its economy, and in 2010 its budget deficit ate a third of GDP. Spain has battled 20 percent unemployment, more than twice our official rate, even after their housing run stopped.

This is another story best told through picture. Since every debt crisis is also a growth crisis, we've put together this second gallery of graphs on Europe's bond yields and unemployment rates:



But wait. It gets worse. Europe is rotting from the outside in. Germany's hot recovery is cooling. French banks face significant exposure to Spain and Italy's troubles. The United Kingdom's experiment in austerity is backfiring. The city of London, which was even more finance-focused than New York City before the crash, is literally burning as austerity and months of negative growth unnerve the city's young unemployed population.

ARE WE DOOMED?

If the U.S. and Europe are at the edge of a cliff today, it is a shorter cliff than in 2007. The good news is that we have less room to fall. The bad news is that nobody expects a soft landing. There will be no more fiscal stimulus. There is less room for monetary stimulus. The only sure antidote to our crises is time.

Europe's fundamental problem is debt in a handful of states. The continent needs to find a way to offer these states access to the broad euro market. If Greece can borrow at closer to the Euro rate rather than the Greek rate, they'll be safer. Three years after Europe's richest government absorbed the risk of private banks, they will have to absorb the risk of smaller governments.

In the U.S., we have all but run out of new ideas. Government is becoming a drag on the economy. Our trade deficit is a huge drain of capital. Washington can't resolve the housing crisis for people who are underwater, and businesses are increasingly looking overseas to invest.

If you're looking for silver linings, best to take the long view. Financial crises can be decade-long affairs, as families, businesses and banks build back to normalcy. But there is every reason to expect full recovery. Unlike Japan, which has lost two decades to a financial bust, we have a young workforce with a steady stream of immigrants and a culture of risk and entrepreneurship. The road out of recession has led us back to the brink of recession. But even in stalled recovery, the United States is the world's leader in education and innovation. In the long run, if you can wait for it, the road leads back to growth.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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