All eyes are on North Korea and its repressed economic system this week after the country announced early Monday that Kim Jong Il, the ruling dictator for 17 years, died Saturday. The political instability to follow Kim Jong Il's death could ripple through the global economy, weighing on confidence and growth.

Kim Jong Un, the third son of the deceased leader, will take his place. Kim Jong Un is only in his late-twenties, and has only been groomed for the role since 2008, compared to his father's 14 years of training.

While North Korea has remained economically isolated from much of the world, its military aggression, volatile relationship with South Korea and the United States, and the uncertainty surrounding Kim Jong Un's readiness to lead has put the world on alert.

"This is a tinderbox situation," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Almost nothing is known about Kim Jong Un, this "Great Successor.' The deeper questions are the longer-term issues related to a potential power struggle within the ruling elite, given that Kim Jong Un may not have the training nor the power base from which to assume control. Now is the time to watch carefully."

That said, here's what to monitor in the global economy as North Korea rebuilds after Kim Jon Il's death.

North Korea's economic future: North Korea is a notoriously closed society and has shunned foreign investment. Kim Jong Il had started to show signs of possibly being open to economic reform. He even toured Chinese factories to learn about their rapid economic growth, and visited Russia to discuss building a gas pipeline across North Korea.

Of course, that's unlikely to change at least until the country's new leader gets established.

Still, there's hope the long-term outlook for North Korea will change since Kim Jong Un has more Western world exposure than his father, having attended school in Switzerland. That could encourage him to reach out more to other countries to help improve his impoverished nation.

"With China as its example, I am hopeful that North Korea comes out of its shell and slowly crawls to its borders to see who is willing to start a dialogue and trading with the rogue robot nation," said Money Morning Capital Waves Strategist Shah Gilani. "If it's going to be a scary and not a salutary coming out party, all bets are off; but I'm a betting man, and I'm betting North Korea will emerge from its cocoon."

South Korea's economy: South Korea faces the biggest economic disruption. The country already forecast a drastic export slowdown for 2012, with shipments growing only 7.4% next year, compared to 19.2% in 2011. The threat of North Korean instability could also slam consumer confidence, and cause the economy to grow even slower than the 3.7% gain predicted for next year.

If you think the global economy is out of the woods now that the European Union (EU) has expanded its effort to solve the sovereign debt crisis, then I'm afraid you're sorely mistaken.

No doubt, the European crisis is far from being solved - but that's hardly the only potential economic catastrophe looming on the horizon.

Indeed, two successive articles in the Financial Times last week warned of a new disaster approaching: They forecast 25% declines in financing volume for both commodities finance and aircraft purchases in 2012.

Now that would be truly bad news.

You see, the most job-destroying feature of the 2008-09 recession was a 17% decline in world trade that was caused by the financial crash and the disruption to the world's banks. That decline intensified recessionary conditions and caused millions of job losses worldwide. Some 700,000 jobs were being lost each month in the United States alone for a period in early 2009. That's more than double the previous worst monthly losses since World War II.

And now we could be in for a repeat.

In fact, it's hard to see how one can be avoided.

In today's distorted world financial system, a combination of over-loose monetary policy, intractable budget deficits, and tightening regulation seems to have made a credit crunch more or less inevitable.

So if you're smart, you'll take a moment to examine exactly why, and then figure out who the winners and losers are going to be.

Here's how.

A Disruptive Disconnect

When you look at bank lending, it's clear that the link between the huge amount of world money growth and the meager supply of lending to productive enterprise is broken.

U.S. Federal Reserve Chairman Ben S. Bernanke and his international colleagues can hand as much money as they like out to banks, but if the banks don't lend it, that money will be wasted. And right now the banks aren't lending to trade and private businesses for three reasons:

It's been a rough few weeks for the Eurozone.

Portugal is still in trouble, Spain will be back on the coals after its elections, and if I were a bond trader, I would be shorting Belgium, which has serious deficit and debt problems, runs for months at a time without a government and is in some danger of splitting apart into its French and Flemish bits.

A bailout package for Greece has been agreed to, but the Greeks are struggling to get a government to implement it. And yields on Italian bonds are moving ominously higher, rising above the 7% that some think marks a point of no return.

So does this mean that a euro breakup and a Eurozone economic collapse are inevitable?

Not really.

In fact, of all the European nations in crisis, only Italy has the potential to take down either the euro or the global economy.

Just take a look for yourself.
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Getting Rid of Greece

At this point, Greece obviously is a goner as far as the Eurozone is concerned.

Really, it should have been pushed out 18 months ago, when it was first revealed that the country falsified its figures to gain acceptance into the Eurozone in the first place. Its government deficit at the time was 12% of gross domestic product (GDP) - not the 6% it claimed, let alone the 3% it had agreed to abide to on its entry.

French President Nicolas Sarkozy already has admitted it was a mistake to let Greece into the Eurozone, because the gap between its economy and the well-managed polities of Northern Europe was much larger than the area's other members.

Former communist countries like Slovenia and Slovakia have integrated quite smoothly into the Eurozone, because their governments and people had already acquired the discipline necessary for membership. But since its entry into the European Union (EU) in 1981, Greece has lived on handouts, and raised its living standards artificially to a level two or three times the market value of its output. Exit from the euro is inevitable; Greece's problem cannot be solved in any other way.

In fact, the sooner Greece exits the euro, the better. As it stands now, it's rapidly becoming impossible for Greece to get its debt down to a manageable level, since the country's official debt has been deemed untouchable.

Once the EU leaders acknowledge the need to remove Greece from the Eurozone, the country's exit will be neither difficult nor damaging. The process of recreating the drachma will be similar to that followed in Slovenia, Croatia, and other ex-Yugoslav republics which abandoned the Yugoslav dinar in the 1990s.

Inevitably, Greece will have to default on much of its debt, but it's already doing that now.

So if it's handled correctly, Greece should not be a problem for the Eurozone or the world economy.

The PIIG Pen

The other smaller Eurozone weaklings aren't major problems, either.

Ireland had a banking problem because of its immense real estate bubble, and the government got into trouble because it foolishly guaranteed the banks. However, Ireland's current account is now in surplus and its economy appears to have begun growing again - despite draconian austerity measures.

Portugal, like Ireland, has replaced the government that caused the problem, which was largely one of public-sector overspending. However, it could run into difficulty again.

Portugal's living standards (like Greece's, but to a much lesser extent) are higher than justified by its productivity, and its balance of payments is still heavily in deficit. It's in between Greece, which should definitely leave the Eurozone, and Latvia, which was able to bring its economy under control without losing its currency link to the euro.

If Portugal gets in trouble again, leaving the euro will be much easier, and in the long run, better for its economy than forcing further austerity measures. Because it is so small, Portugal won't damage the Eurozone by leaving it. Instead, like Greece, it represents just a trimming at the edges.

Spain's elections should produce a better government, committed to austerity. While it has a much lower debt level than Greece, Italy or Portugal, it combined a real estate bubble with government profligacy. If Italy stabilizes, the market's attention will revert to Spain, but it can probably survive with a dose of austerity and good government.

Belgium is a basket case in terms of public debt, but the vast income it earns from the EU headquarters allows it to run a balance of payments surplus. It's badly run, and for long periods of time not run at all, but probably not an immediate threat to the system - and it would be bailed out if it needed it.

The Eurozone's Achilles Heel

Finally, we have Italy - the Eurozone's Achilles heel.

Italy has slow growth and only moderate payments and budget deficits. Its high debt level is the result of decades of profligate government spending before Silvio Berlusconi came along. Berlusconi achieved less than he promised, but he cut government spending, raised the pension age and considerably improved Italy's finances. If he's succeeded by a capable center-right statesman, Italy should be fine, and the market panic should die down.

However, with Berlusconi's coalition having lost its majority, and the president an aged leftist, there is a substantial chance of instability. If an election takes place that is won by the left, or if a "government of technocrats" that is in practice dominated by the left is appointed, then the corruption and special interests in the Italian political system may prevent necessary spending cuts and reforms, possibly imposing tax increases instead.

Since Italy is already overtaxed, and tax compliance is among the lowest in the EU, higher taxes result in revenue loss and economic downturn that could tip the country over the edge.

Also, since Italy is so large, the EU lacks the money to bail it out. Worse, its departure from the euro would destroy the currency and cause a major global recession. Our own economic health thus depends on the machinations of Italian politics.

Still, in any scenario other than a complete Italian collapse, most of the EU will continue to do fine, although the Eurozone's growth will be constrained by bailout costs and austerity measures.

Of course, non-Eurozone EU countries that are capably managed and have a labor cost advantage over Germany, France, and Italy should continue to do fine, benefiting from not having to pay for bailouts.

For that reason, you might look at the Market Vectors Poland Fund (NYSE: PLND), which has suffered unjustified contagion from the euro mess and is trading on only 9-times earnings.

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In lowering its growth forecast for the United States and Europe, the International Monetary Fund (IMF) warned of "severe repercussions" unless drastic measures are taken soon.

But don't expect the warning to spawn any real action.

"The global economy has entered a dangerous new phase," Olivier Blanchard, the IMF's chief economist said in the report released yesterday (Tuesday). "The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks."

The IMF slashed its 2011 growth forecast for the U.S. economy from the 2.5% estimate it offered in June all the way down to 1.5%. Next year won't be any better: The 2.7% 2012 projection the IMF offered in June was cut all the way to 1.8%.

"Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse in market confidence that could seriously disrupt global stability," the IMF said.

But with governments in Europe moving slowly to contain the sovereign debt crisis afflicting the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the United States suffering from political gridlock, the IMF's call to action will likely go unheeded.

In recent weeks, U.S. President Barack Obama has proposed a jobs plan, as well as a deficit reduction plan. But with congressional Republicans opposed to elements of those plans - primarily increases in spending and taxes - the swift policy action the IMF sees as critical will likely be stillborn .

In Europe, the IMF is calling for bold action to contain the debt crisis. It is particularly worried that a Greek default could cause many large banks - which own much of the Greek debt - to take large losses.

That U.S. banks are intertwined with European banks heightens the risk.

According to Money Morning C apital W ave S trategist Shah Gilani, "U.S. banks are widely believed to have $41 billion of direct exposure to Greece" and have loaned heavily to their European counterparts.

More sobering, Gilani says, is that "U.S. money-market funds have a hefty European exposure, too." He noted that 12% of the loans made by our biggest money-market funds were made to three big European banks - two of which, Societe Generale SA (PINK ADR: SCGLY) and Credit Agricole SA, were downgraded by Moody's Corp. (NYSE: MCO) just last week.

The third, BNP Paribas SA, remains under review.