Europe's debt woes threaten eurozone – and the US

Europe's debt woes will lead to further declines in the euro and European stocks. The risk to the US? Its banks.

If the United States dips back into recession, the eurozone will have helped push it over the edge. Indeed, investors' concerns about the eurozone's myriad financial and economic woes have been a big factor in the global stock market plunge this summer.

The plunge is due partly to the uncertainty caused by European leaders, who seem determined to preserve an untenable status quo. These structural problems could make the eurozone's economic predicament even more challenging than America's.

The latest Greek bailout – €109 billion ($156 billion) in July on top of last year's €110 billion – will accomplish very little in the long run. Markets suggest that the European debt crisis isn't over.

The euro's climb against the dollar ended in May, then began a saw-toothed pattern along a declining trend. European stocks display the same pattern. As the crisis persists, I foresee more drops in the euro and European stocks.

Economic growth in the eurozone is also weak, rising just 0.2 percent in the second quarter. Gross domestic product in powerhouse Germany grew an anemic 0.1 percent while France's GDP growth was flat. With a global slowdown under way, demand for European exports – the source of European growth overall – is likely to wane, too.

The current eurozone structure has proved to be unfeasible, so two choices remain: Allow and encourage weak members to leave the common currency or move toward much more complete fiscal and even political integration. Departures would create a big mess. Those leaving would return to their own currencies and devalue massively against the euro. Then Germany, France, and others would need to bail out their own banks due to their heavy exposure to the departed.

Further and substantial fiscal and monetary integration is probably preferable to the demise of the eurozone, but this option is also packed with problems. Jean-Claude Trichet, president of the European Central Bank, recently called for a "new type of confederation of sovereign states," and wants a new ministry of finance with powers to override governments that receive aid but don't live up to promised reforms. He also wants a fully integrated European banking system. The International Monetary Fund also desires further integration in Europe along with more central oversight of members' budgets.

The problem with these proposals is that to many of the smaller nations, they look like a takeover by Germany, which, in conjunction with France, would probably call the shots.

The financial turmoil and economic weakness in Europe may very well spawn another recession there. And a downturn would dampen European imports and US exports. Only 16 percent of US exports go to the eurozone and 23 percent to the European Union, including Britain. But the US banking system has considerable exposure: 26 percent of its global lending is to the eurozone; 45 percent if Britain is included.

The eurozone structure reminds me of the Articles of Confederation, which very loosely governed the original 13 US Colonies. Without central control, getting things done was very difficult. Finally, in 1789, the US Constitution was ratified with a meaningful central government. Is Europe headed for a similar destiny?

Perhaps, but the Colonies had all belonged to England, had common language and customs, and felt pressure from ongoing threats from Europe. The eurozone will have to find its moment of truth in an internal debt threat that won't go away.

– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."