Image: Europe © Corbis

If you're like most Americans, you're probably sick of hearing about the crisis in Europe. The bailouts. The political turmoil. The frantic meetings. The credit downgrades. And now there is talk of a deep new recession across the pond as the eurozone moves closer to splintering.

People want to hear instead about the issues that matter to them. What about the job market? Why are home prices falling again? Will Congress keep unemployment benefits and tax cuts going? And when, if ever, will I get a raise?

But here's the thing: Europe matters. And it doesn't matter just to us; it matters to the rest of the world, too. Reverberations are being felt everywhere. After all, the eurozone is the largest economic entity on Earth.

Image: Anthony Mirhaydari

Anthony Mirhaydari

Europe is China's largest trading partner. With Europe heading into recession, the latest factory-activity report out of China pointed to the largest drop since the depths of the recession in early 2009.

Brazil, whose commodities fuel China's production lines, saw its economy grind to a halt in the third quarter -- a sharp retreat from the 7.5% annual growth seen last year.

Europe is also a major U.S. trading partner and the destination for some $240 billion in goods and services at a time when exporting is one of the few areas of strength. And more importantly, while the U.S. banking system has relatively little exposure to the debt of countries like Greece and Ireland, it maintains significant exposure to Europe's banks -- which in turn maintain huge exposures to those troubled countries.

With that in mind, here's why the eurozone's days are numbered, and why it matters to all of us:

Dead currency walking

A lot has happened since the eurozone debt crisis first ignited in the spring of 2010 (and since people first started worrying about government debt because of difficulties in Dubai in late 2009) -- far too much to review it all here.

But at the most fundamental level, the current crisis stems from structural problems in the currency union that led to excessive borrowing and a lack of economic reforms:

  • A single, shared interest rate for both misers like Germany and spendthrifts like Greece.
  • A lack of fiscal discipline and enforcement.
  • The inability of the European Central Bank to regulate local banking standards.

(These problems were identified but ignored when the euro was born back in the early 1990s on Faustian hopes of a united Europe.)

As the situation snowballed on worsening budget balances in the "PIIGS" (Portugal, Ireland, Italy, Greece and Spain) countries and financial sector turbulence, Germany's prescription as Europe's creditor was straight out of the playbook responsible for the 1937 downturn that prolonged the Great Depression: tax hikes, spending cuts and deep fiscal austerity at a time of economic vulnerability.

Combined with ongoing joblessness and loss of wealth (Greece is entering its fourth calendar year of recession, while Spain's unemployment rate is approaching 23%), the pain caused by this approach has fueled violent protests and political instability. New governments have been installed across the PIIGS nations as voters rage against their leaders. Desperate to keep popular anger from derailing austerity efforts, unelected technocrats have taken power in Rome and Athens.

The situation has deteriorated relentlessly as politicians tiptoe around angry constituents and a bond market that is losing patience.

An agreement in July to expand Europe's bailout fund barely passed parliamentary votes in the 17 eurozone countries -- and a failure by the Slovakian government to placate nationalists nearly upended the process. An agreement in October -- to expand Europe's bailout fund with private funding and cut Greece's debt load by 50% via voluntary debt write-downs -- was undone by a move to put the plan to a popular vote in Greece and by the increasing inability of Europe to finance itself.

Now the endgame approaches.