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Will Europe’s Economic Instability Lead to a World-Wide Financial Crisis?

A European crisis that's worse than the 2008 collapse of Lehman Brothers? It's possible, according to some analysts and officials.

Europe is experiencing severe economic strain as the global economy continues to sputter along. Early this morning, The Blaze brought you a report that explores the potential consequences of the death of the euro. Now, The New York Times, among other outlets, is sounding the alarm on European leaders' increasing fears that one of the continent's major banks may fail.

Leaders, of course, have a reason to worry. With economic conditions continuing to be subpar, the prospect of a major bank failure is a horrifying one. Considering what happened in America following Lehman Brothers' collapse just three years ago, these worries are certainly legitimate.

The Times reports about Europe's quest to ensure this same fate doesn't befall one of its own banks. But the newspaper isn't the only outlet warning about potential calamity. In a Telegraph piece by Jeremy Warner entitled, "Is the

World Doomed to Suffer Another Depression?," these same themes are addressed. Warner writes:

We appear to be at another pivotal moment, with Western economies once more staring into the abyss. At a conference in Frankfurt this week, Josef Ackermann, chief executive of Deutsche Bank, compared events to the Lehman Brothers catastrophe of 2008 and warned that many banks in Europe are essentially bust.

While European leaders are steadfast about avoiding such a catastrophe, the economic landscape has changed. While the continent's leaders are ready to use hundreds of billions of euros in bailout funds to avoid economic chaos, American banks are playing it safe. The Times writes:

...questions continue to mount about the ability of Europe’s banks to ride out the crisis, as some are having a harder time securing loans needed for daily operations.

American financial institutions, seeking to inoculate themselves from the growing risks, are increasingly wary of making new short-term loans in some cases and are pulling back from doing business with their European counterparts — moves that could exacerbate the funding problems of European banks.

Let's think about the ramifications of a potential disaster. While some here in America and others outside of Europe may simply ignore such a prospect dismissing it as a European problem, the situation is more complicated than that. Federal Reserve Chairman Ben S. Bernanke has, himself, noted that a European crisis could expand to impact other global regions. The nature of the worldwide economy creates a scenario in which economic pains could quickly shoot from Europe across the Atlantic in no time.

The Times reports that European bank shares are at their lowest point since early 2009 and markets took a hit on Tuesday. Considering these indicators, European leaders have been putting safeguards in place to avoid a Lehman-like implosion. Among them:

- New credit lines were opened by the European Central Bank to assist institutions in need of funding

- The proposed Greek bailout will assist nations on the continent with loans that will help recapitalize and financially restructure banks

- The Central Bank has been purchasing bonds from Italy and Spain to avoid a spike in interest rates, allowing for European banks to "shed troubled assets for cash"

Of course, these are merely attempts at prevention before more serious remedies are needed. The problems are complex, as the Times notes:

In Europe, the worry is that government bonds owned by European banks could fall sharply in value if economically distressed countries cannot pay back their loans. That would saddle the most exposed banks with huge losses.

As a result, banks are reluctant to lend money to one another and are hoarding cash. “If sentiment continues to deteriorate, ultimately we’ll see a deposit run,” Mr. Finch said. “I’m extremely worried about that.”

In an editorial on Tuesday, The Washington Post questioned Europe's fiscal unity, highlighting some of the issues that complicate financial matters between the continent's different nations:

You wouldn’t know it from the way European technocrats discuss the issue, but the E.U.’s lack of fiscal union is not a mere question of governance or institutional design. It is a basic problem of legitimacy. It reflects very real differences of culture, language and history across Europe, as well as citizens’ real, if loosely articulated, concerns about surrendering control over their pocketbooks to a distant bureaucracy.

Clearly, the situation is multifaceted and challenging to say the least. Europe's many cultures, diverse financial practices and the like create complicated issues when it comes to rectifying the situation on a macro level. But no matter how difficult it is to remedy, the world's economy depends on all leaders, European and American, alike, to come together to address this ongoing global dilemma.

One last thing…
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