Gloom from U.S. financial crisis infects Europe

updated 5:34 p.m. ET Sept. 18, 2008

LONDON - This is a bad time to be a purveyor of $1,800 pens. Or a seller of champagne, sports cars or big bouquets of flowers.

Few people feel like splashing out in the City, London's financial district, which is convulsing from the aftershocks of Wall Street's financial crisis. Thousands of jobs have already been lost, financial institutions have disappeared overnight, rumors swirl — and no one knows where it will end.

After years of economic boom in which City workers became famous for six-figure bonuses, lavish lunches and champagne-fueled parties, the mood has turned somber.

"The City is run by two huge emotions: greed and fear," said Geraint Anderson, a former banking analyst who chronicled a lifestyle of decadent excess in "Cityboy: Beer and Loathing in the Square Mile."

"People think the party is over."

Britain takes beating, Ireland hit hard
It's not just the bankers, brokers and analysts who are worried, but tens of thousands who rely on them for a livelihood. Some 350,000 people work in the square mile of the City — about 60 percent in finance, the rest in other businesses and support services.

"This time last year, people were spending a lot of money," said Luis Rosete, manager of The Pen Shop, a boutique selling exquisitely expensive writing implements in the heart of the City. "We have pens for 1,000 pounds ($1,800) — and people were buying them. Now, there are lots of people coming in, but it's mostly just browsing."

In cafes and pubs and on trading floors, everyone is talking about the crisis that — this week alone — has seen the bankruptcy of American investment bank Lehman Brothers, the U.S. government bailout of insurer AIG and the takeover of foundering British bank HBOS by rival Lloyds TSB.

"People are fearing for their jobs," said John Allsopp, who works in IT for an American investment bank. "And you just wonder how it got here."

The financial earthquake that began in the U.S. subprime housing market has shaken economies across Europe.

Ireland has been among the hardest hit. An economy that boomed by wooing hundreds of American companies with low corporate taxes is now on the brink of recession.

"You'd have to go back in history to find things going so badly," said John Mahoney, 39, a stockbroker taking a smoking break outside his office on Dublin's riverside. "The Celtic Tiger seems a long time ago."

Spain, whose buoyant economy was once Europe's envy, also is watching the financial turmoil with particular worry. Following the collapse of the construction boom that drove a decade of economic growth, Spain is saddled with stagnant growth, 10.7 percent unemployment and inflation at nearly 5 percent.

"There is a lot of mistrust, and in the stock market that means great volatility, and a lot of rumorology fueled by news from the United States," said Oscar Moreno, an analyst with Madrid-based brokerage Renta 4.

Vulnerable economies
Other European countries are less exposed. The Lehman Brothers collapse sent chills through Europe's financial sector but may cause only limited losses. Ratings agency Standard & Poor's said potential losses at Europe's banks and insurers from Lehman's bankruptcy were "moderate and manageable."

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