Fears have spread through markets and finance ministries that the debt burdens and other problems in the eurozone could help plunge the world into a global recession.
With Washington now publicly engaging with European governments on these issues, a cogent analysis of the stakes for the U.S. and the limits of leverage for the Obama administration in promoting solutions appeared on NPR, the national U.S. public radio network.
Meanwhile the reasoning for the warning by IMF Director-General Christine Lagarde – that “the global economy is entering a dangerous new phase” – is laid out in this debate on BBC that pinpointed slowing growth across almost all regions of the world and the absence of timely concerted action by political leaders in the EU and in the U.S. Congress. The televised debate coincided with the G-20 meeting that opened in Washington on Sep. 23 and brought together leaders of Europe, the U.S., China and emerging markets. Afterwards, The G20 announced their intention “to take all necessary actions to preserve the stability of banking systems and financial markets as required,” adding that in November they would come out with a “bold action plan.” The promise was greeted by markets as more deja vu all over again.
As discussed in an earlier European Institute blog post, the decision by Treasury Secretary Timothy Geithner to travel to Europe for a eurozone ministerial meeting (marking the first time a U.S. official at this high level has taken part directly in such talks) underscored U.S. concern about the impact of the apparently worsening eurozone performance and made it clear that euro's plight is spreading fear throughout the world.
On the U.S. vested interest in avoiding a eurozone crash, Nigel Gault, chief economist at private consultants IHS Global Insight, told NPR that a recession in Europe could hit the U.S. hard since Europe is their biggest market. U.S. investments could take a beating, too, in Europe – an area where they are the most heavily concentrated.
The lack of consensus among the 17 government in the eurozone is a cause for alarm, he said. U.S. leaders have pushed Europeans – sometimes arousing a backlash from European officials who blame Washington for much of the global problem – to act faster and more boldly prevent the situation from deteriorating the point beyond any control. But, Gault said, “up until now, the Europeans have been behind the curve ball all the way.” Gault said in the NPR story.
The IMF’s Lagarde emphasized the need for not only European but global consensus and action. “There is a path for recovery,” she said. “That path is not as wide as [it was at the onset of the crisis] in 2008, it is narrower. But if there is a collective will, a collective drive, to actually take that path and apply the remedies and the set of policies that we see, there is hope for the future.”
During the debate, the euro crisis was perceived as the most pressing policy urgency confronting world economic leaders. Olli Rehn, EU Commissioner for Economic and Monetary Affairs, expressed concern about limits in the problem-solving capabilities of the member states, which are aggravating the sputtering growth in the eurozone.
One thesis was that the world was seeing a permanent economic metamorphosis. “We are going through a tectonic shift, not a cyclical phase,” according to Mohammed El-Erian, head of Pimco, the world’s biggest bond broker.
El-Erian concluded: “So far, neither Europe nor the U.S. has offered a destination… “Europe is trying to play its own music, the U.S. is trying to play its own music, and the emerging world is trying to play its own music.”
European Affairs