I’ve been meaning to write about this for the longest time. While the state of the American economy is of much concern, the current state of affairs in the Europe makes our problems look like a walk in the park.
The fundamental problem in Europe has been the attempt at consolidating disparate economic systems and values into a single source, thanks to the Euro. While this has had some success when things were going well, it would seem that this is not particularly true when things are going badly.
This is also complicated by the political climate in the constituent countries and of course, the display of absolute maturity over silly rivalries (because all those Saxons, Anglo Saxons and Vikings are *oh-so-different*).
But there is a deeper issue here. And that is that while the American financial system has been mismanaged, that does not compared to the way Europeans have mangled theirs.
Paul Kedrosky recently had a post on How the US Saved the European Banking System. In his post, he quotes a short report by Daniel Gros & Stefano Micossi that provides an interesting little table (The beginning of the end game [PDF]).

And to give you an idea of the leverage issues, Lehman had a leverage of 24 (gross, of course — net leverage ratio was 12, which is debt-times-equity).
Goldman keeps its leverage trimmed at around 17-22 (depending on the time of the day and market conditions, of course). Of course, Goldman’s leverage has also been more sustainable in general because Goldman hasn’t needed to borrow as much as its competitors.
The other factor is even more scary. And that is the asset valuation of the financial institutions relative to the GDP of their host nations.

To make it worse, countries are worried about pooling money to help banks in other countries within the EU when their own institutions are struggling. And can you really blame them? This, more than anything, calls into question the sustainability of Euro as a currency.
The other thing that I’ve heard from my friends in the industry is that certain European banking laws give banks the option of not disclosing certain pieces of information that are necessary for banks in other countries. This, of course, makes it hard to estimate the exact financial health of these institutions.
So, given these facts, is it any wonder that European banks and governments are scared? For example, the whole exchange between UK and Iceland seems childish (a friend called it Britain’s revenge for the Viking invasion of 400 800 A.D.). But then, people do funny things when they are scared.
So, Euro death watch, anyone?