The European Central Bank looms large over the Euro debt crisis. Photo: soumit (flickr)

As Europe attempts to thwart a broader global recession, it is facing what many economists refer to as a trilemma, and poorer countries could be the victims.

A financial trilemma is comprised of three goals that policy makers try to achieve: (1) a stable/fixed exchange rate; (2) an economy open to international flows of capital; and (3) a sound monetary policy to stabilize the economy.

Here's the catch: In reality you can only achieve two of these goals, not all three.

In 1999, the Eurozone decided to give up the third goal, independent monetary policy. In exchange, they enjoy a common currency across 17 member nations and the freedom to exchange money and goods across borders. Though the European Central Bank creates monetary and fiscal policy for the European Union, each member nation relinquishes its own control.

This becomes an issue when a country gets into financial trouble and must defer to the European Central Bank or greater European Union. This was recently evidenced with the bailout and continuing debt problems in Greece.

Potential for problems arise due to our ever globalized, interconnected world. Eurozone policies are far-reaching, extending their grasp to neighboring emerging markets dependent on foreign dollars. With austerity measures becoming the norm, lenders are avoiding risk and could cut foreign lending in favor of keeping business in their own backyard. The Economist references a speech by the Financial Stability Board head, Mark Carney, in which he warned about the damage if the European bank were to deleverage on the world economy.

Many emerging economies in Eastern Europe depend on both foreign aid and outside investment. If the Eurozone's financial well runs dry the effect will ripple throughout Eastern Europe, even the U.S. Poorer E.U. members worry that they'll emerge the victims. French president Nicolas Sarkozy rocked the political world after his comments at a University of Strasbourg debate on November 8, where he described a proposal for a two-speed Europe, presumably divided between richer and poorer nations.

What part does the European Central Bank (ECB) play in this? That’s the question everyone is asking. Similar to the U.S. Federal Reserve, the ECB has the power and leverage to swoop in and bail out E.U. members on the brink of collapse. They are hesitating, however. Germany feels the ECB should step in only as a last resort. Many policymakers in Germany believe that the current crisis is forcing reform and thus serving a purpose, as recently expressed in The New York Times.

With optimism waning on debt solutions for the U.S. and abroad, tensions mount and consensus becomes imperative. Politics need to be set aside before any sort of real dialogue can exist. Will the E.U. decide on a two-speed Europe? Will any countries abandon the Euro? The implications for emerging markets are considerable; several outcomes could result in global recession.

Police in Reykjavik, Iceland after a violent protest turned into a riot on January 20. Photo: finnur.malmquist (flickr)

It’s a lot worse than just about everyone thought. By some estimates, the economic crisis could cost 50 million jobs worldwide. That's a catastrophic number, and even their potential loss is already fueling some discontent and sounding alarms.

Worried about the ripple effects of widespread unemployment, the U.S. Central Intelligence Agency recently added the state of the economy to the agency's list of top security threats. Retired Admiral Dennis Blair, the U.S. Director of National Intelligence, warned that "economic crises increase the risk of regime-threatening instability if they persist over a one-to-two-year period."

On the international stage, United Nations Secretary-General Ban Ki-moon voiced his concern: "If not handled, today’s financial crisis will become tomorrow’s human crisis. Social unrest and political instability will grow, exacerbating all other problems."

Violent flare-ups over the economic recession and resulting unemployment are already occurring all over the globe.

In Pakistan, chronic power outages have forced many textile factories to close down for hours at a time, triggering thousands of angry protesters to set fire to the state-owned power company's office. Government cuts in Lithuania’s social programs prompted protesters to pelt the parliament building with eggs and rocks ; at least 14 people were injured and 84 detained. Chinese police officers are now undergoing special training to deal with expected social unrest over factory closings that have left millions of migrant workers out of a job.

Iceland and Latvia serve as extreme examples of the devastating consequences from the declining state of the worldwide economy: both countries’ respective governments collapsed under the pressure of the economic crisis.

However, security experts are concerned about other forms of collateral damage that extend beyond protests. Bruno Tertrais, a strategic and security expert at the Foundation for Strategic Research in Paris tells Time Magazine that he believes the biggest threat to international security is "the collapse of regimes vital to maintaining international order." Tertrais cites Somalia as an example — a place where, after the collapse of its government, piracy has gained a foothold and severely disrupted shipping routes along the horn of Africa.

Extreme poverty has always posed a threat, especially in the world’s emerging economies. However, the breadth and force of the current global economic crisis poses a threat to all nations, whether rich or poor.

Latvia's government collapsed following weeks of financial instability. The New York Times explains some of the events leading up the resignation of Prime Minister Ivars Godmanis:

[T]he country’s export-driven economy, which burned red-hot when easy credit flooded the world banking system, has ground to a halt. Unemployment has rocketed in Latvia, while those who have managed to hold on to their jobs are receiving significantly less pay. Public discontent, unsurprisingly, is rising, while trust in the government has plummeted. Violence broke out in January after about 10,000 people gathered for a peaceful demonstration. Scores of protesters battled police officers and ransacked stores, and 40 people were injured.

Last month GDP shrank by 10.5 percent and is expected to shrink 12 percent by the end of 2009 — a number some analysts say is optimistic. Latvia is the first member country of the European Union whose government has fallen as a result of the economic crisis.