Most constraining of all are the effects of still-tightening fiscal austerity. Led by the Germans, the European Union has insisted on severe spending cuts and tax increases in any nation seeking financial aid. Greece, Ireland, and Portugal have already committed to draconian deficit-reduction schedules. Matters have driven Spain and Italy onto similar paths. Though France, Germany, the Netherlands and other stronger European economies plan nothing so dramatic as the periphery, they have their own, more moderate, deficit-reduction plans. Further, the cutbacks in Europe's beleaguered periphery as well as slowdowns in China, India, and other emerging economies will constrain export growth in Europe's stronger economies.

This single-minded emphasis on austerity, though ultimately necessary for Europe to correct its fiscal imbalances, is unfortunate on at least two counts. First, it will contribute to the immediate recessionary forces. Second, it threatens that vicious, self-defeating cycle in which budget restraint slows or halts growth, denying governments revenue, forcing them to spend more on social services and so enlarging deficits, a development that, in turn, forces still more austerity that depresses growth and enlarges deficits still more. In such a world, hope dies that these governments can ever secure budgets that can repay their debts.

Europe could answer such concerns by pursuing a growth strategy in addition to austerity. Such a combination might seem counterintuitive, but, as pointed out by Italian Prime Minister Mario Monti and IMF head Christine Lagarde, opportunities to pursue both strategies simultaneously exist. Even while squeezing their budgets from a macro perspective, the nations on the zone's periphery—Greece, Ireland, Italy, Portugal and Spain—could, for instance, promote growth by loosening their famously restrictive labor laws. They could propel economic activity by revising their growth-stifling tax codes and by easing regulatory restrictions. Privatization could at once raise funds to retire debt and promise greater efficiencies. A combination of such efforts could overcome much of the immediate, growth-dampening effects of macro spending cuts and tax increases, and also help these economies avoid the vicious cycle that austerity otherwise threatens.

That Europe, as a whole, seems unenthusiastic about such a growth agenda only leaves it that much more vulnerable to the significant recessionary forces already confronting it. The recession will likely go deeper and the budget problems will likely get worse than they otherwise would have. Even so, the United States will feel only a limited impact. Export sales will slow, of course, as will the flow of profits from the very substantial operations many American firms have in Europe. But since the eurozone accounts for only about 12% of U.S. exports (compared, for instance, to over 25% for just Canada and Mexico), the European recession, unless it is much more severe than even the pessimists suggest, is not likely to turn even slow American growth into a recession. Europe's decline will probably shave only two- to three-tenths of a percent off America's real growth pace, pushing it to the low side of the 2% to 2½% trend rate established since the 2008-2009 recession.