What Is an Economic Tsunami?

An economic tsunami is a phenomenon created by a singular event or a small series of events which have a far-reaching negative effect on economies around the world. Just like an actual tsunami creates widespread destruction, this kind of economic disaster can have effects on those far from where the problem originated. In the past, such an event might have been contained within a single nation's economy. The increasingly interconnected nature of the global economy in the modern world makes the aftermath of an economic tsunami far more damaging and widespread than it might have been otherwise.

Citizens of one country may have the mistaken belief that they only need to be concerned about economic conditions in their own country. It can be a difficult concept to grasp that a financial crisis in a faraway country might have an effect on them. This is the reality, however, in a world where economies are connected easily by improved travel and communications technology. As a result, the possibility for an economic tsunami is more realistic now more than ever.

In 2008, an economic tsunami, started by a crisis in the United States caused by unsafe lending practices on mortgages, was felt worldwide. A domino effect resulted which not only caused destructive economic consequences in the U.S. but also harmed economies from all over the world that depended on the strength of the U.S. economy. Such an event showed how just a crisis seemingly located in one area could easily spread.

What has made an economic tsunami more likely than ever before is the way that countries are now financially linked to each other. If one country owes money to another, their economic fortunes are essentially tied together. Should the country that owes the money undergo economic turmoil, the country to which the money is owed would suffer as a result. The latter country would have to take its own measures to stabilize its economy, measures that would affect its citizens.

In the past, it seemed like an economic tsunami could only be caused by turmoil in one of the world's economic leaders. It has become increasingly apparent, however, that even problems in a smaller country can make a dent in the world's economy. For example, the fact that many European countries are tied together by a single currency means that those countries have an obligation to try and help each other out. As a result, the problems of a single European country can become magnified to a potentially disastrous degree.