How will European economic woes impact us?

CLARKONOMICS: Portugal, Ireland, Italy, Greece and Spain are really in a mess. But what does that mean for your wallet? I believe it’s still too early to tell.

Greece has been the greatest flashpoint of late. Simply put, Greece is insolvent. The Greek people have lived on borrowed time for too long with a government payroll that is way outsized, plus obligations that are unsustainable.

The other countries have other ailments. Ireland has the failure of it banks and the real estate bust over there. Portugal has excess government obligations. Spain has local governments that overcommitted on spending, high unemployment and banks that are only solvent because of bailouts.

The worry is that one of these countries is going to unravel. I read a story in Barron’s about how there are people in the financial world speculating that this is beginning of a second financial crisis in the world, kind of like the one we had in the banking sector over here in America.

I don’t know that that’s true. That may be an extreme position, though I guess it is possible.

In the meantime, the instability in Europe has slowed their economic growth. But the effect on us? It’s too early to call. I’ve heard a lot of very learned people argue convincingly about possible outcomes and they’re all over the board.

For us, we as country have to get our financial house in order. We can’t continue to obligate and spend money we don’t have. As far as a default on U.S. debt, that may get everybody’s attention, but it would not be good for our economy. It could be necessary as a temporary weapon to try to get everybody to focus on what we’re going to do about U.S. obligations. But actual default would be quite serious for our economy.

The difference in today’s situation from the past is that we were flying blind in the last financial catastrophe. Nobody saw it coming. This time, the issues are clear on the table. What’s unclear is what the effects will be on us.

But this much is clear for government at all levels, both domestic and international: You cannot commit to obligations you cannot afford. Period. Eventually, it blows up on you.