On Friday and over the weekend, hope reemerged for progress in Europe's sovereign debt crisis as new governments swept to power in Italy and Greece.
But reality set in again on Monday as Italy was forced to pay yields of 6.29% on a 5-year, $4.1 billion debt offering, the highest yield since 1997. The euro and European averages fell in reaction, with notable weakness again in bank stocks.
"Europe is in one of its toughest, perhaps the toughest hour since World War Two," Germany chancellor Angela Merkel said Monday, Reuters reports. "If the euro fails then Europe fails, and we want to prevent and we will prevent this, this is what we are working for, because it is such a huge historical project."
Americans should very much pay attention to what's happening in Europe for two main reasons, says David Walker, CEO of the Comeback America Initiative (CAI) and former U.S. Comptroller General.
First, the U.S. economy would not be immune from a major slowdown or recession in Europe, he says.
Secondly, Europe's sovereign debt crisis is preview of where America is heading if we don't get out fiscal house in order, pronto, Walker warns.
"We hear a lot about the PIIGS -- Portugal, Italy, Ireland, Greece and Spain - the truth is, PIIGS are us," he declares.
Because the dollar remains the world's reserve currency, America has time to restore fiscal discipline "but not unlimited time," Walker says, reminding Henry and I that the U.S. fares worse than Italy in CAI's sovereign responsibility rankings. (See: "Huge Interest Rate Risk": U.S. Flunks David Walker's 'Fiscal Fitness' Test)
Regarding the ultimate resolution of Europe's crisis, Merkel is seemingly doubling down on her commitment to the euro -- "the task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union," she said Monday, Bloomberg reports.
But Walker believes the Europeans need to "get realistic" and make the Eurozone smaller, meaning letting profligate nations like Greece go their own way, which is easier said vs. done.