09/15/2011 02:18 pm ET Updated Nov 15, 2011

The European Threat

We have more than enough economic stress of our own to contend with, but the news from Europe is, if anything, even more bleak. Growth in the European Union is slowing, many major banks are scrambling to remain solvent and at least one member of the alliance, Greece, is likely to default on its debt.

A full-fledged fiscal crisis in the European $14 trillion economy will have huge repercussions on this side of the pond. The world banking system is global, and our financial connections to Europe are extensive. One of the few bright spots in our economy is the export sector, and a significant portion of our exports go to Europe. If the EU goes into recession, which it is a distinct possibility, it will put intense stress on our businesses and financial institutions.

The risk is real. Right now all eyes are on Germany as the banker of last resort, but Chancellor Angela Merkel's political base is under stress. The German people are in an uproar about their hard earned money being used to bail out irresponsible neighbors. Merkel's government may be forced to withdraw support for the European Community Bank's efforts to bail out Greece and Italy. That would threaten the solidarity of the EU.

The real threat in Europe is not recession, however, but a far more serious sovereign debt problem that is now threatening solvency of European banks. On Wednesday, Moody's downgraded credit raging of two French banks - Societe Generale SA and Credit Agricole SA. If one of these European banks were to go bad, we would be looking at a new financial crisis.

The basic cause of Europe's woes is the same as here - an entitlement mentality that has become entrenched throughout the political process. The people of western democracies have grown accustomed to a good standard of living and expect their governments to sustain it. That has led to overly generous social programs that are much more lavish and expensive than ours. Workers in European nations enjoy excellent pay and benefits, extended vacation time, short work weeks, and virtual lifetime job security. When a European worker loses his job, an infrequent occurrence, his income remains pretty much the same as when working.

In sum, the Europeans have had a very good deal for a very long time, but to pay for it their governments have indulged ever greater deficit spending, running up huge debts that are becoming unsustainable. Now the Euro countries are caught up in a "vicious circle," between sovereign debt default, inadequate bank solvency, and negative economic growth.

As serious as our problems are, our banking system is not as vulnerable as that of Europe. One or more of these banks will either go under or have to be bailed out. The global community is trying to find a way to provide additional liquidity to European banks in exchange to sharp cuts in spending. It is a desperate race and we all have a huge stake in the outcome.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.