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Will Europe tip the world into recession?

(MoneyWatch) "Tio!" is "uncle!" in Spanish and it may be what Spain finally cried over the weekend. The indebted nation became the fourth eurozone country (after Ireland, Greece and Portugal) to accept assistance from EU, IMF, and eurozone financial officials since the debt crisis began. (For more on Europe, see "Europe debt meltdown: How did we get here?") European officials will provide $125 billion, though there were few details on the conditions of the package.

It's almost five years since the early days of the financial crisis. In the summer of 2007, Countrywide Mortgage warned of "difficult conditions"; Bear Stearns liquidated two hedge funds that were making risky sub-prime bets; and the FOMC said "downside risks to growth have increased appreciably."

Although few could see it, those events were the warning signs that a crisis was brewing, despite surging stock markets that would reach all-time highs in the autumn of 2007. The European sovereign debt debacle - the globe's second financial crisis in five years - is occurring in plain sight, for all to see. It's hard to believe that it has been three years since Greece owned up to just how big a mountain of debt the country had amassed. Three years and the eurozone leaders are still debating how to contain the crisis from spreading to the much larger economy of Spain. The downside of Europe's three years of dithering is clear: Inaction could cause contagion and ultimately, could tip the globe into recession.

The only upside to the slow-motion crisis is that U.S. banks have reduced exposure to European sovereign and bank debt. Still, if the EU and European banks melt down, the U.S. will not be immune. U.S. banks will feel tremendous pain, because the global financial system is interconnected. Additionally, a eurozone implosion would hit U.S. manufacturing, as exports to Europe would dry up and the cost of those exports would rise with a stronger dollar. Finally, if Europe plunges into a deep recession as a result of the sovereign debt crisis, U.S. growth and job creation could stall and the odds of another recession would increase dramatically.

Sounds pretty bad, but optimists note that since every eurozone nation has so much to lose if the eurozone implodes; a solution is on the horizon. Pessimists remind us that we are dealing with 17 distinct nations, each with its own domestic issues that can color what might be seen as the best possible outcome for the world's second largest economy.

All eyes will be on Europe this week and the second Greek election on Sunday, June 17. Additionally, there will be reports on U.S. inflation, which is expected to have slowed as oil and gas prices retreated from recent highs. Muted inflation may provide the Federal Reserve ample cover to act, just in case things get dicey in Europe. After all, does anyone really think that the Fed is going to stand pat if the world unravels?

For those who seek theater, J.P. Morgan Chase's CEO will be on the hot seat, as he testifies before the Senate Banking Committee about the company's massive trading losses. Lawmakers will grill Jamie Dimon about internal controls, but will likely use the testimony as a forum to debate regulatory reform and the virtues and vices of the Volcker Rule.

The European optimists won the battle for the week, at least in terms of stocks. All three indexes enjoyed their best weekly gains of the year.

-- DJIA: 12,554, up 3.6% on week, up 2.8% on year

-- S&P 500: 1,325, up 3.7% on week, up 5.4% on year

-- NASDAQ: 2,858, up 4%, up 9.7% on year

-- July Crude Oil: $84.10, up 1% on week

-- August Gold: $1,622.10 down 2% on the week

-- AAA National Average Price for Gallon of Regular Gas: $3.54


Mon 6/11:

IMF releases report on Spanish Banks

Tues 6/12:

8:30 Import Export Priced

2:00 Treasury Budget

Weds 6/13:

JP Morgan Chase CEO Jamie Dimon testifies before the Senate Banking Committee about the company's massive trading losses

7:00 MBA mortgage purchase applications index

8:30 Producer Price Index

8:30 Retail Sales

10:00 Business Inventories

Thurs 6/14:

8:30 Weekly jobless claims

8:30 Consumer Price Index

Fri 6/15:

Quadruple Witching: stock index futures, stock index options, stock options and single stock futures all expire, which can lead to increased volatility

8:30 Empire State Manufacturing

9:15 Industrial Production

9:55 U Michigan Consumer Sentiment