Scott Sumner writes:
Stocks crashed 4% today because people are increasingly worried about the macroeconomy. Yes, there are real aspects to the Greek crisis. Greece will need to engage in austerity over the next few weeks. But Greece, Portugal, and Spain are not big enough countries to knock 25% off the price of oil in one month. Oil prices are plunging for the same reason as US equity prices are plummeting–fear of a sharp fall in AD (and hence economic activity) all over the world.
I don't yet follow Scott's reasoning. If anything, in very recent times the ECB has shown it is willing to abandon independence to monetize various national debts. How much that will boost nominal GDP I am not sure, but I don't take it as negative news for nominal GDP, relative to previous expectations.
I am usually reluctant to play "market psychologist," but I see potentially insolvent banks as a major issue, plus their connection to money market funds. That has an AD link to be sure, but the uncertainty of another major bailout, and its fallout for intermediation, would be paralyzing to financial markets. Most of all, the fear is that "Europe-as-we-knew-it" was a bubble of sorts, and that other people's digestion and comprehension of that possibility will create adjustment problems around the world, including China.
I'm not convinced that the "end of the tunnel" for Europe on this one has to be so dire. (Imagine the 1987 world, with Greece not on the Euro, and extrapolate it, with Greece in default a lot of the time but with most of Europe simply being Europe; is it so bad?) It's the uncertainty about the transition path and what that path means for broader notions of European cooperation. It's like imagining a man committed to driving from here to there, yet with no paved road in between or maybe also no unpaved road. Yet Europe is committed to the journey.