WASHINGTON – From money managers in the United States to garment makers in southern China, the business world is fixated on Europe's debt crisis.
"You're constantly glued to it," says Peter Tchir, who runs the hedge fund TF Market Advisors. "You're feeling like at any time the market can move 2 or 3 percent based on some headline, and with Europe it's from 4 in the morning on."
"Everybody's nervous," says Willy Lin, managing director of Milo's Knitwear (International), which makes pullovers, cardigans and jackets at three factories in southern China and sells 95 percent of them in Europe. Lin fears Europe' troubles will sink his sales next year.
Not in decades, analysts say, has Europe so gripped investors, business leaders and policymakers. The state of the U.S. economy, normally the focus of global markets and policymakers, has become almost an afterthought.
A hint of a setback in solving the crisis tends to darken hopes and thrash stock prices. A sign of progress ignites optimism and stock buying.
Behind the gyrations is fear that policymakers will fail to lighten the debts that are crushing Italy, Spain and Portugal and threatening the banks that bought their bonds.
If the crisis isn't settled, Europe could lose its common currency, the euro. A collapse of the eurozone would likely trigger bank failures, a credit freeze and a global recession.
"It's the threat that's keeping everyone glued to their screens at the moment," said Paul Ashworth, an economist at Capital Economics.
Attention is about to turn to Brussels, where political leaders will meet Friday for a European Union summit. Hopes are high that the meeting will yield a plan big and bold enough to calm markets.
Mario Draghi, head of the European Central Bank, has hinted that the ECB will consider doing more to push down interest rates. Doing so would ease borrowing costs for Spain, Italy and other European countries.
Yet each day, events seem to swing from encouraging to deflating and back again:
— The resignation of a previously obscure European Central Bank official in September sent markets tumbling.
— News last week that major central banks would make it easier for banks to borrow U.S. dollars fueled a 500-point jump in the Dow Jones industrial average, its best day in 2½ years.
— On Wednesday, world markets veered up on optimism that Friday's summit would produce a resolution to the crisis, then fell after a German official warned that a deal was unlikely this week.
The euro's creation in 1999 raised the stakes. The common currency helped turn Europe into a potent force. The 27 nations of the European Union — 17 of which use the euro — form the world's biggest economy.
But a unified Europe also encouraged banks to lend across the continent. So banks loaded up on debt of countries like Spain, Greece and Portugal. Problems in the weakest countries could infect banks in the strongest.
Across the world, too, banks expanded their exposure to Europe through loans and investments.
The euro's problems "involve far more banks (and) weigh more heavily in their portfolio than any single predecessor currency," says Jan deVries, a professor of history and economics at the University of California at Berkeley.
Daniel Drezner, professor of international politics at Tufts University, says the United States hasn't been so worried about Europe's economy since right after World War II. Back then, the Truman administration feared Communists would exploit hard times to seize power in France and Italy. The result was the Marshall Plan, the U.S. aid program that helped restore Europe's health.
The last time a purely economic crisis in Europe posed such a global threat, Drezner says, was in 1931, when the Austrian bank Credit-Anstalt failed. A panic ensued. In that crisis, as in today's, political differences among European governments blocked a quick fix.
This time, Germany, the continent's strongest economy, is insisting that European governments adopt enforceable rules to prevent overspending.
But that could take months. It would require changing the treaty governing the European Union or writing a new treaty for the eurozone. In the meantime, Italy, Spain and Portugal face unsustainable debts. Investors are demanding ruinously high yields to buy their bonds.
The key plan taking shape would enforce budget discipline on the eurozone. Afterward, the ECB could aggressively buy the debt of the most troubled nations, driving down their borrowing costs.
Without relief, struggling countries might abandon the euro. Depositors would pull money from banks in troubled countries that dropped the euro. Savers wouldn't want their euros replaced with weaker national currencies. A banking crisis could spread. Europe's economy might topple.
The U.S. and global economies would suffer if credit froze and European economies fell into recession. U.S. banks' exposure to the eurozone exceeds 240 percent of their cushion against potential losses. The U.S. banks could be badly hurt if a eurozone country defaulted and caused bank failures across Europe.
Fear of a panic is one reason Treasury Secretary Timothy Geithner flew to Europe to meet with eurozone leaders before Friday's summit.
In the past, the United States has tended to shrug off financial problems overseas. Europe's troubles in 1992 and the Asian financial crisis of 1997-1998 caused little damage to the U.S. economy.
But America is struggling now. Unemployment remains at a recession-level 8.6 percent. The economy is growing too slowly to quickly lower unemployment.
Anxiety has also been rippling through China, the world's No. 2 economy, whose factories send Europe low-cost shoes, toys and furniture. In a sign of what might be coming, China's exports to Italy sank 17 percent in October from a year earlier.
"A recession is going to mean that demand for goods from China is going to sink precipitously," said Doug Guthrie, dean of the George Washington University School of Business.
At Milo Knitwear, Lin said he expects 2012 to be painful.
Niall Ferguson, a historian at Harvard's Center for European Studies, expects Europe's leaders to reach an agreement to save the euro and the continent's economic union.
But a deal will likely be costly, he says, because Germany is demanding tax increases and government spending cuts that would crimp Europe's growth.
"The way the Germans are playing this, insisting on rigid budgetary discipline, is a recipe for zero growth in the eurozone for years to come," Ferguson says.
AP Business Writers Kelvin Chan in Hong Kong and Daniel Wagner and Christopher S. Rugaber in Washington contributed to this report.
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