EU Crisis: Forgotten but Not Gone

The EU economy has fallen out of the headlines, but it's still a major trouble spot.

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Not long ago, Europe was every economist's nightmare. A worried U.S. sent top officials to push the eurozone to fix its problems, and it was impossible to pick up a newspaper's business section without reading about European credit downgrades.

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The tide has turned since then, and to the casual observer, it may appear that the European threat has all but disappeared, as the frightening prospect of a eurozone breakup has dissipated. Fed Chairman Ben Bernanke, for example, has gone from listing Europe as a key economic "headwind" last September to naming it almost as an afterthought in his press conference on June 19.

Is it that Europe has improved so much so fast? Not quite. Here are a few reasons why Europe is no longer at the center of global economic fears, despite the heavy drag it's still creating globally.

1) They've improved their situation (somewhat)

It's a "no, duh" answer but worth mentioning first — the reason Europe is no longer at the forefront of American economists' worries is because the immediate threats like financial contagion and a eurozone breakup have dissipated, at least for now. Interest rates on government debt in some of the continent's least-healthy countries – Spain, Italy, and Greece, for example – have come down again, signaling calmer investors. In addition, the European Central Bank now has a plan in place to stabilize rates if investor fears distort government bond markets in the future. ECB President Mario Draghi also promised last fall to do "whatever it takes" to keep the union together, a statement that calmed fears about future euro zone troubles.

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In addition, austerity measures in many European countries have helped to bring deficits sharply downward, though debt continues to rise.

2) "Chronic" is less newsworthy than "acute"

One might liken the EU to a patient recovering from a heart attack: the worst is over, but the question now is how it gets healthy.

"If we define the threat as the imminent blowup of the euro, the collapse of the common currency and the serial bank failures ... that threat is I think for all respects and purposes gone," says Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics. "What we have instead is a more structural, grinding crisis. Now we've had six quarters of recession."

Those fixes will not be quick; austerity measures have helped to bring EU deficits down dramatically but have also slowed economic growth. In Greece and Spain, the jobless rate is above 25 percent, and youth unemployment is above 50 percent.

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"There's a contraction going on in the eurozone, and there's no real plan to speed up growth," says Scheherazade Rehman, director of the European Union Research Center at George Washington University. "Some of this is still going to come to a head."

She believes that some countries, like Italy and Greece, have not made the necessary structural reforms to creating long-term, stable growth. The high jobless rates likewise continue to inspire massive protests in places like Spain. The EU recession is also a blow to U.S. businesses, as it hurts EU demand for U.S. goods and the welfare of the many U.S. firms that have invested in Europe. Finally, lower economic growth means lower government revenue, which ultimately could also make for further debt problems in the future.

3) "Media exhaustion"

That's the first reason Rehman gives for why Europe has fallen out of the headlines. Though she believes Europe's troubles will continue for years to come, the constant drumbeat of bad news and low-grade recession out of Europe doesn't make for sexy headlines.

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"How many times can you say that Europe is not moving?" she says. "They have no growth plan...and I think what you're going to see is a lot of years of zero growth."

4) The U.S. is getting much better.