A prolonged financial turmoil in Europe could impact the fragile global economic recovery and result in serious fallouts for the US economy, according to the Federal Reserve.
US Federal Reserve governor Daniel K Tarullo has also warned that heightened European financial problems could also seep into the financial markets worldwide.
”... a deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for US trade and economic growth,” Mr. Tarullo said in a testimony before the House of Representatives on Thursday.
According to him, the crisis could impose losses on American financial institutions that have exposure to some European countries.
“In addition to imposing direct losses on US institutions, a heightening of financial stress in Europe could be transmitted to financial markets globally,” he noted.
Mr. Tarullo pointed out that one avenue through which the turmoil in Europe might affect the national economy is by weakening the asset quality and capital positions of US financial institutions.
The spiralling European debt crisis, with its epicentre in Greece, has rattled investors worldwide and even threatens to derail the still fragile global economic recovery.
Earlier this month, euro zone nations and the IMF pledged a multi—billion euro rescue package for Greece, to help the nation tide over the immediate debt turmoil.
Moreover, the Fed official said that intense European crisis could hurt American trade since the region accounts for about a quarter of US merchandise exports.
“A moderate economic slowdown across Europe would cause US export growth to fall, weighing on US economic performance by a discernible, but modest extent,” he added.