The Europeans are in the midst of their most serious economic crisis in 60 years, and now they're hearing it's not just their own fate they have to consider: The whole global economy hangs in the balance.
This could easily be what pushes them, from my projection of a relatively mild and shallow recession, into something much deeper and longer lasting.
The International Monetary Fund last week warned that if Europe's problems get any worse, it could push the entire world back into recession.
European Union leaders, meeting in Brussels on Monday, are said to be close to resolving some of their most difficult issues — and they'd better be.
IMF Managing Director Christine Lagarde has been busy reminding the Europeans what's at stake.
"There's no leader that I have spoken to in the last few weeks that has not mentioned the euro crisis as top priority on his or her agenda," Lagarde said in a recent interview with the BBC. "The Europeans are clearly under huge pressure."
Some economists question the IMF's mostly pessimistic outlook on Europe. In fact, there are some positive signs: borrowing costs for the most indebted countries have actually gone down, and the European leaders are close to agreement on a big bailout mechanism. But Jacob Kirkegaard of the Peterson Institute for International Economics says some governments have had to do so many budget cuts that they've endangered their own growth prospects.
"That is the main reason, in my opinion, that we're seeing a slowdown in the euro area as a whole," Kirkegaard says, "and that both Italy and Spain are likely to fall back into recession in 2012."
And then there's the Iran problem. The European Union planned to institute its embargo on Iranian oil gradually, over the next six months. Countries that buy Iranian oil — Greece, Italy and Spain particularly — need that time to find alternative oil suppliers. But Iran has upset that plan with its threat to cut off the oil before those countries have a chance to prepare.
Cliff Kupchan of the Eurasia Group says they shouldn't be surprised.
"Iran has a long history of saying, 'OK, I'll see you and raise you 10.' This would be consistent with that pattern," Kupchan says.
Iran currently exports about 600,000 barrels of oil each day to Europe, so it would lose revenue by shutting that business down. But Kupchan, a Middle East analyst, says Iran could fairly quickly find other markets for its oil; more quickly perhaps than the Europeans could find other sellers.
"I think it would be a lot more painful for the Europeans, in that they're going to have to get the Saudis, primarily, to provide them with more supply," he says. "That's time consuming ... I think Iran could cause distress to European markets if it does choose to go this route."
Kupchan and other analysts say other governments would probably come to the rescue if Iran tries to punish Greece, Italy and Spain. But in the short term, at least those three countries could face higher oil prices.
Jacob Kirkegaard of the Peterson Institute says if they have difficulty replacing the lost Iranian oil, these fragile economies could quickly find themselves in much deeper trouble.
"This could easily be what pushes them, from my projection of a relatively mild and shallow recession, into something much deeper and longer lasting," he says.
That longer lasting event could have the potential for destabilizing all of Europe, he says. And as goes Europe, so may go the global economy.
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