The world is watching ... each other's economies

Europe is wrestling with a debt crisis. Economic growth in powerhouse China appears to be slowing. And in the United States, political paralysis has left policymakers with few tools to fight a slowdown.

Christine Lagarde, head of the International Monetary Fund, warned this week that the world was entering a “dangerous phase.” The leader of the World Bank said he loses confidence daily that the global economy can avoid a new recession.

Financial markets fear the worst. The Dow Jones industrials fell almost 6 percent Wednesday and Thursday before an uneasy calm returned Friday to finish its worst week since the week that ended Oct. 10, 2008, when the Dow fell 18 percent. That was at the height of the financial crisis. The carnage hit markets in Europe and Asia, too.

Here’s a region-by-region guide to what worries the experts.

EUROPE: BATTLING A DEBT CRISIS AND WATCHING GREECE

Fears about Europe’s debt increased early Friday on news that Moody’s Investors Service had downgraded its ratings of eight Greek banks by two notches. Investors have been waiting in vain for news that Greece will receive the next installment of a bailout package in time to avoid defaulting on its debt next month. If it defaults, banks throughout Europe are likely to lose the money they invested in Greek bonds — and investors fear that could ultimately lead to a recession in Europe and the U.S.

Greece, Ireland and Portugal have already required bailouts from the European Union and the IMF. Italy and Spain, which are much bigger economies, might need them, too.

A $149 billion bailout has kept Greece afloat for the past year. It’s due for another $148 billion rescue negotiated over the summer. But creditors are balking at delivering the second package. They say Greece has fallen behind on commitments to cut government deficits and make its economy more competitive.

European officials are speaking openly of the possibility of a Greek default. If global credit markets were to freeze the way they did three years ago, that would slow economies on both sides of the Atlantic.

European governments have opted for austerity measures, cutting spending and raising taxes instead of taking steps to jump-start sputtering economic growth.

Recent reports suggest the European economy is already decelerating. The IMF just shaved its forecast for European growth this year to 1.6 percent from 2 percent, and for next year to 1.1 percent from 1.7 percent. One closely watched index of industrial activity just signaled an outright contraction.

Pressure is growing on the European Central Bank to reverse course and start cutting interest rates.

THE UNITED STATES: FED ACTS, BUT WHAT NOW?

U.S. markets sank this week even though the Federal Reserve offered a bigger dose of economic stimulus than investors had expected: The Fed plans to reshuffle $400 billion of its investments in hopes of pushing down interest rates on mortgages and other long-term loans.

Lower rates are supposed to coax consumers and businesses into borrowing and spending. The Fed also plans to invest proceeds from maturing U.S. Treasury debt into mortgage bonds in an effort to support the housing market.

But economists say the Fed’s effort — dubbed Operation Twist after a similar Fed program conducted during the Chubby Checker dance craze of the early 1960s — probably won’t make much difference.

Rates on mortgages and other loans are already the lowest in decades. Frightened Americans would rather cut their debts than borrow, and businesses aren’t seeing enough sales to justify hiring and expanding despite rock-bottom borrowing costs.

That leaves fiscal policy — government spending programs and tax cuts — as the only other way to juice growth. But political bickering is preventing Washington from doing much of anything.

Congressional Republicans are focused on cutting deficits, not widening them in the name of helping the economy. They are resisting President Barack Obama’s $447 billion plan to generate jobs with payroll-tax cuts and more spending for roads, bridges, schools and other infrastructure projects.

CHINA: HINT OF A SLOWDOWN RATTLES INVESTORS

The Chinese economy is supposed to account for one-third of global growth this year. Increasingly, other countries depend on China’s insatiable demand for raw materials and machinery to give their own economies a lift. The mining towns of western Australia, for instance, are booming as they fill orders from China for iron, zinc and coal.

So any signs the Chinese economy might be slowing are sure to frazzle investors. And a report this week showing that Chinese manufacturing is contracting sent financial markets into a tailspin.

Perhaps it shouldn’t have been a surprise: China’s central bank has been raising interest rates to slow growth and bring inflation under control. Analysts say investors overreacted to one limited report. The world’s second-biggest economy may be slowing, they say, but it still boasts enviable rates of growth. Yet despite China’s rising power, experts say its economy is still not big or strong enough to compensate for meltdowns elsewhere: Chinese investment and spending is only one-sixth that of the European Union and United States.