The Euromess could hit the U.S. by way of Asia

(Michael Probst - AP) A new report from the Asian Development Bank explains that the single biggest threat to the Asia’s growth in 2012 is fallout from the euro-zone crisis. The danger, they say, isn’t so much financial contagion — Asia, like the U.S., has limited direct exposure to European banks — as weak growth:

The greatest risk to the outlook is the continued uncertainty over resolving the sovereign debt problems in the eurozone. The “orderly default” on Greece’s debt in March 2012 diminished the risk of a liquidity crunch in the short run, but calls for fiscal austerity across the eurozone will act as a drag on growth. ... Developing Asia’s policy makers need to prepare for the possibility of an extended period of low European demand for exports.

In particularly, the ADB points out that Asia’s supply chains remain extremely vulnerable to plummeting demand from outside the region:

Global value chains — the production model behind East and Southeast Asia’s export success — amplify external shocks. The 2008-2009 global trade collapse highlighted this vulnerability, as external demand for final goods dried up and the impact rippled through the region’s supply chains. Asia’s export production structure and demand sources have changed little since then, and a steep drop in final goods demand from the major industrial countries would still strongly compress aggregate demand for exports throughout the region.

It’s this kind of global domino effect that could bring the euro-zone crisis to the United States. Europe is now China’s largest trading partner, so a significant slowdown in Europe and Asia could be enough to trigger a global recession just as the U.S. economy struggles to come back.