Europe is the world's biggest market, representing more than 30 per cent of global GDP. A recession in Europe will hit the global economy, there won't be anywhere to hide.
Australian Treasury secretary Martin Parkinson says Europe is definitely headed for a recession. The only question is for how long and how deep.
So what the impact be on the rest of the world? Academics at Wharton say it will cripple economic growth and short-circuit any recovery. They say it could could lead to a new instability in the international financial system that would restrict access to credit and choke growth. JP Morgan Chase and Goldman Sachs recently disclosed to shareholders that they have sold derivatives covering more than $5 trillion of global debt. Although they haven't identified how much of that amount has been issued by European countries with sovereign debt problems, such as Greece, Italy and Spain, you can bet a fair chunk of that comes from the European basket case countries.
As The Guardian says, it's going to be a bumpy year. "The outlook for the global economy in 2012 is clear, but it isn't pretty: recession in Europe, anaemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth."
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