Europe didn’t really have problems in subprime mortgages, but nonetheless, the effects of the United States’ problems were far-reaching. The economies of Europe are seen as tightly linked to those of the rest of the world, writes Jack Ewing for Spiegel Online International.

Bankruptcies are up 11% on the continent. Unemployment reached 7.4% in December compared to 6.8% a year earlier. The International Monetary Fund (IMF) predicts that output in the European zone may fall by 2% this year.

What are the problems?

• One issue is that there is no single government to stand up and create a coherent rescue plan. The European Central Bank has broad powers over the economy, but it has fewer policy tools like the ones implemented by the U.S. Federal Reserve.
• Europe does not have the necessary institutions with a clear mandate to respond to banking problems on a regional level. The union probably needs a single securities and bank regulator instead of a hodgepodge of national bodies, and there are talks of creating a Europe-wide deposit insurance fund.
• The EU is the United States’ largest trading partner, as well as a hotspot for Asian exports. Much of Europe is dependent on exports. Unfortunately, slumping exports, coupled with lower consumer spending, has weaker companies across Europe closing up shop. But even the healthy companies are struggling to get by, too.
• In poorer European countries, some nations have large current account deficits and they are now bogged down by the cost of repaying loans that have grown after depreciating currencies. It is seen that some countries with weakened currencies want to adopt the euro to protect themselves from further depreciations.

Europe has some competitive advantages, such as their fervent investment in nuclear, solar and wind power on top of a history of energy conservation, which makes them less vulnerable to oil shocks. Their consumer debt is also rather low and more conservative lending practices could led to a faster recovery of their financial institutions.

British Prime Minister Gordon Brown, for his part, urged Congress to “seize this moment” and pull together to fight the recession, global climate change and thwart Iran’s nuclear ambitions, reports Ben Pershing for The Washington Post. He also pushed for an agreement on rules and standards for all banks, ahead of the G-20 summit in April.

• Vanguard Europe Pacific ETF (VEA): down 17.1% in the last month
• BLDRs Europe 100 ADR Index Fund (ADRU): down 17.9% in the last month
• Vanguard European ETF (VGK): down 18.7% in the last month
• PowerShares FTSE RAFI Europe Portfolio (PEF): down 18% in the last month
• PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD): down 13.9% in the last month

Figures released in mid-August showed that the euro-zone economy shriveled to an annualized rate of 0.8% during the second quarter. It was the biggest reversal since 2001.

Purchasing and manufacturing data are reflecting this slump, consumer confidence is low, and business confidence within the three largest European economies – Germany, France and Italy – is lagging, reports The Economist. Germany’s downturn is causing particular dismay, since it was one of the few countries that sidestepped the global house-price boom.

In general, the sentiment for the global credit crunch is blamed on America. Many Europeans, Germans in particular, feel that they do not deserve this reversal of fortune, as they did not create this situation. But one economist says that Germany profited from the credit-fueled boom and were part of the game.

Elsewhere in Europe, housing mania took hold, but Ireland’s bust might be the most dramatic of all. Its GDP grew 6% in 2007, but is on pace to shrink this year.

Euro inflation fell to 3.8% in August from a record high of 4% in June and July, offering some glimmer of hope.

• Vanguard Europe Pacific ETF (VEA), down 16.8% year-to-date
• BLDRs Europe 100 ADR Index Fund (ADRU), down 17.7% year-to-date
• Vanguard European ETF (VGK), down 17.8% year-to-date
• PowerShares FTSE RAFI Europe Portfolio (PEF), down 20.8% year-to-date
• PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD), down 21.6% year-to-date