By Roger Runningen - Sep 29, 2011 3:24 AM GMT+0700
President Barack Obama said Europe’s debt crisis continues to be a drag on the U.S. economy and the response of governments there hasn’t been as robust as needed.
The Obama administration has been stepping up its criticism of European actions in the 18-month crisis amid concern that a default by Greece could plunge the global economy into a recession.
“Some of the challenges that we’ve had over the last several months actually have to do with the fact that, in Europe, we haven’t seen them deal with their banking system and their financial system as effectively as they needed to,” Obama said in response to a question about U.S. economic growth during a roundtable discussion on Hispanic issues at the White House.
Obama didn’t specify what steps should be taken. It was the second time this week he has addressed the situation in Europe after saying on Sept. 26 that it’s “scaring the world.”
“It would be safe to say they’ve ratcheted it up,” Pierre Ellis, senior global economist at the research firm Decision Economics in New York, said of recent comments by Obama and Treasury Secretary Timothy F. Geithner.
Geithner called on governments to unite with the European Central Bank to beef-up the capacity of their 440 billion euro ($594 billion) bailout fund. At the annual meeting of the International Monetary Fund and World Bank on Sept. 24 in Washington, he warned that failure to combat the Greek-led turmoil could lead to “cascading default, bank runs and catastrophic risk.”
Bank Concerns
“What everybody fears is a sort of Round II of a credit crunch,” Ellis said. Europe may be “very vulnerable to problems with debt over there and that, in turn, causing problems for our banks. And, of course, the White House is certainly not averse to finding reasons for problems in our economy.”
As investors watched for signs of progress in Europe’s efforts to stem the government debt crisis U.S. stocks halted a three-day rally and the euro reversed an early gain versus the dollar. Treasuries trimmed losses as the 10-year note’s yield headed for its biggest increase over four days since January 2009.
The Standard & Poor’s 500 Index lost 2.1 percent to 1,151.26 at 4 p.m. New York time after climbing 0.8 percent earlier and rallying 4.1 percent over the previous three sessions. The euro weakened 0.3 percent to $1.3548, erasing a 0.8 percent advance. Ten-year yields rose two basis points to 2.01 percent and have climbed 27 points in four days.
Government Contacts
The administration has been in contact with European governments, urging officials “at the presidential level, at the ministerial level” to “take forceful and direct action” to deal with the crisis, White House press secretary Jay Carney said at a briefing after Obama spoke.
While the debt situation in Europe is “certainly a matter of concern,” Obama administration officials continue to believe that governments there have the “financial wherewithal” to deal with the crisis, Carney said.
Experts from the European Commission, the European Central Bank and the International Monetary Fund will return to Athens tomorrow as officials race to put in place measures that cordon off Greece. They will resume a review of whether Greece has met the conditions for the next slice of the initial, 110 billion euro ($150 billion) bailout package engineered last year.
Political Concern
Obama is facing re-election next year and the economy will be the top issue in the presidential contest and campaigns for Congress.
The Office of Management and Budget, in an August update of economic administration forecasts, projected the U.S. economy will grow at a sluggish 1.7 percent rate this year and the jobless rate will average 9.1 percent. At the start of the year, the White House forecast a growth rate of 2.7 percent.
Growth will pick up in 2012, with the economy expanding 2.6 percent on a year-over-year basis, the OMB said.
The International Monetary Fund cut its forecast for global growth and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over a fiscal plan.
Pressure from the U.S. has caused friction with Europe. Austrian Finance Minister Maria Fekter said earlier this month that she found it “peculiar” to be lectured by the U.S., a country with higher aggregate debt than the euro area.
The OMB forecasts the federal budget deficit will be $1.3 trillion for the fiscal year that ends Sept. 30 -- 8.8 percent of gross domestic product -- and $956 billion in fiscal 2012. The budget office’s estimates total deficits over the next decade at $5.75 trillion from 2012-2021.
Obama’s proposals for cutting the long-term U.S. debt have run into resistance from Republicans, who control the House of Representatives and oppose raising taxes to narrow the deficit.
To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
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