When Chips Were Down On Euro, Obama Showed U.S. Support, "Not Schadenfreude”     Print Email

(October 13) The U.S. played a substantial role – and a very constructive one – in helping European leaders crystallize their rescue last spring of the eurozone, according to a reconstruction of some critical moments in the crisis.

The positive U.S. role has been confirmed by Olli Rehn, EU monetary affairs commissioner: “There was no American schadenfreude. They were supportive and ready to help with their experience of crisis management.” A new blow-by-blow account of euro’s near-meltdown, drawn from interviews with key players, appears in a Financial Times series of three articles.

Confirmation of the positive American role in seeking to defend the euro, as demonstrated in the FT narrative, should help dispel doubts about fundamental U.S. support for closer, stronger European integration and its single currency. Some European political circles have long accused the U.S. of lurking resentment or fears about the existence of the European single currency. If such U.S. opposition exists at all, it is confined to some hardline euro skeptics. Of course, when it comes to a different issue – doubts about the euro’s long-term viability – that is a much more open question to many American specialists. But in practice in the latest and most severe test of the euro, the actions of the Obama administration showed Washington living up to the unwavering U.S. public posture of support.

Critical moments in the latest and most severe crisis for the eurozone – and for the U.S.’s supportive attitude – came in spring 2010. At this juncture, the EU had bailed out Greece, but had not grasped the larger nettle: the fact that the problem had metastasized and threatened to engulf other weak European economies. At this crucial juncture, while ECB President Jean-Claude Trichet warned of impending disaster to hesitant EU leaders, top Obama administration officials weighed in, pressing them with strong advice (and indications of help) to take drastic urgent action to save the euro from global market pressures.

Crucial turning points came at three dinners in April and May. The first, held in Washington (at the Canadian embassy hosting the Group of Seven), was called to resolve the follow-on consequences of an initially-inadequate Greek crisis that had been set two weeks earlier. At that time, the EU and IMF had promised Greece a $62 billion bailout, but it was necessary to hold an April 22 follow-on meeting, hosted in Washington by Canadian Finance Minister Jim Flaherty. There, U.S. Federal Reserve officials insisted to the other finance ministers and central bankers from the Group of Seven (including four EU members) that the move had been an insufficient amount to re-stabilize the euro. The meeting concluded with a plan to quickly construct a more substantial bailout.

Held at the IMF headquarters in Washington, the second meeting (including ECB President Jean-Claude Trichet, Greek Finance Minister George Papaconstantinou, EU Monetary Affairs Commissioner Olli Rehn and IMF Director Dominique Strauss-Kahn) focused on the question of who would pay for the €110 billion ($153 billion) Greek bailout: a deal was struck with the IMF to pay half the eurozone’s bill. Within a week, this accord had broadened into a much, much larger overall rescue package of  €750 billion ($1 trillion) for all weak eurozone nations. The role of the IMF (in which the U.S. is the major member) provided a degree of public political credibility – and Obama administration officials were in agreement that the whole challenge might ultimately have to be passed to the G-20 nations, including the U.S (see European Institute blog).

During the first week of May, EU and IMF leaders met in Brussels to decide on the detailed modalities and pay-out schedule of the Greek bailout. Throughout, the process, President Obama was on the phone several times with French President Nicolas Sarkozy and with German Chancellor Angela Merkel.  Tensions between EU leaders and the ECB caused delays and prevented a long-term euro-stabilization plan. But a temporary fix proved manageable: Greece would receive its €110 billion bailout and, even more importantly, the Europeans, partly at U.S. urging, agreed to a €750 billion back-up package for any troubled nation in the 16-member eurozone.  The momentous step staunched the euro crisis.

Going forward, efforts to preserve the euro will probably involve a mix of measures. There will be reluctance to admit new eurozone members who are not truly qualified and probably greater willingness to impose sanctions on errant member states in the name of economic governance. In September, announcing sweeping financial reforms (see European Institute blog), the EU started showing proof that it has shed its old reluctance in enforcing eurozone economic regulations – an attitude bolstered by new confidence in teamwork with Washington.

-- Jennifer Pietras