US recovery hangs on solving EU debt crisis

A year ago most US politicians’ interest in Greek spreads was confined to the relative merits of hummus and taramasalata. These days they are hot debate topics alongside Italian bond yields and a host of European financial arcana. The reason? It’s the economy, stupid.

As the fragile US economy continues to rise slowly out of the abyss, Europe looks like its gravest threat. Apart from the occasional, and spectacularly unsuccessful, nudge from the sidelines the US has had to watch Europe’s mounting debt crisis from afar and the sense of frustration is palpable.

“This is of huge importance to our own economy,” Obama said last week after meeting Herman van Rompuy, European council president; José Manuel Barroso, European commission president, and others. “If Europe is contracting or if Europe is having difficulties, then it’s much more difficult for us to create good jobs here at home.”

Washington will again be closely watching this week’s European summit in Brussels. “US politicians probably haven’t been this interested in Europe since World War II,” jokes Nathan Gonzales, deputy editor of the Rothenberg Political Report, a Washington-based non-partisan political newsletter.

“The economy is the big issue for the 2012 election and Europe is going to be a big part of that,” he said. But Obama has to play a careful game at home as well as abroad. Attempts to push the pace of change have been been sharply rebuffed in Europe, while at home anything smacking of aid for US rivals across the Atlantic will be used against Obama as he tries to encourage the US’s own fragile recovery.

Last week would-be Republican presidential candidate Ron Paul railed against the Federal Reserve’s role in the coordinated move by central banks to prevent credit markets freezing. “The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well connected, too-big-to-fail firms it is bailing out profligate government spending [in Europe],” Paul says.

In fact, analysts point out that part of the reason the Fed acted is that US banks and money market funds have lent heavily to European banks, and would be left painfully exposed in the event of by a eurozone default.

‘Heading in the wrong direction’
Nevertheless, Paul’s attacks could damage Obama if Europe becomes an election issue, says Gonzales, but the real danger to his re-election prospects is the economy and if Europe’s woes “feed into the sentiment that we are heading in the wrong direction”.

The European Union’s share of US exports has dropped from more than a quarter in 1999 to less than 18% today but it is still worth $400-billion and in our ever more connected world a downturn in Europe would hit the rest of the world too, rebounding on the US.

US firms also have huge sums of money directly invested in Europe. No one really seems sure how the euro’s collapse would hit the US financial sector. Fed chairperson Ben Bernanke plays down that risk, but investors are spooked. Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics, said Washington was gravely concerned that the European Central Bank had so far failed to follow the lead of the Fed, which has acted decisively to prop up the US economy, buying $900-billion worth of US treasury bonds in two rounds of “quantitative easing”.


The frustration fails to take account of fundamental differences between the US and Europe, he says. The Fed has far broader powers and a clear mandate compared with the ECB. It is also clear, Kirkegaard says, that the ECB has its own agenda.

“In my opinion it’s been deliberate. The ECB does not want to commit until the Europeans agree to tighter fiscal union. Market mayhem is an effective way of reaching political goals. If they’d done what the markets had wanted a month ago, Silvio Berlusconi would still be in power. Is that good for Italy or Europe?”

Radical action by the ECB cannot come fast enough for Jack Ablin, chief investment officer at Harris Private Bank. “The Europeans need to let the ECB buy them some time. Political solutions will not come quickly enough,” he says. “If the ECB can act, that for me is the trump card, then we can start focusing on other things.” – guardian.co.uk

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Advertising

Inside Facebook’s big bet on Africa

New undersea cables will massively increase bandwidth to the continent

No back to school for teachers just yet

Last week the basic education minister was adamant that teachers will return to school on May 25, but some provinces say not all Covid-19 measures are in place to prevent its spread

Engineering slips out of gear at varsity

Walter Sisulu University wants to reprioritise R178-million that it stands to give back to treasury after failing to spend it

Lockdown relief scheme payouts to employees tops R14-billion

Now employers and employees can apply to the Unemployment Insurance Fund for relief scheme payments
Advertising

Press Releases

Covid-19: Eased lockdown and rule of law Webinar

If you are arrested and fined in lockdown, you do get a criminal record if you pay the admission of guilt fine

Covid-19 and Frontline Workers

Who is caring for the healthcare workers? 'Working together is how we are going to get through this. It’s not just a marathon, it’s a relay'.

PPS webinar Part 2: Small business, big risk

The risks that businesses face and how they can be dealt with are something all business owners should be well acquainted with

Call for applications for the position of GCRO executive director

The Gauteng City-Region Observatory is seeking to appoint a high-calibre researcher and manager to be the executive director and to lead it

DriveRisk stays safe with high-tech thermal camera solution

Itec Evolve installed the screening device within a few days to help the driver behaviour company become compliant with health and safety regulations

Senwes launches Agri Value Chain Food Umbrella

South African farmers can now help to feed the needy by donating part of their bumper maize crop to delivery number 418668

Ethics and internal financial controls add value to the public sector

National treasury is rolling out accounting technician training programmes to upskill those who work in its finance units in public sector accounting principles

Lessons from South Korea for Africa’s development

'Leaders can push people through, through their vision and inspiration, based on their exemplary actions'