Obama May Have Limited Leverage to Influence Europe Crisis Debate at G-20

By Mike Dorning - Nov 3, 2011 6:30 AM GMT+0700

The leader of the world’s largest economy may have limited influence on the biggest current threat to the global recovery, the main topic for a two-day Group of 20 summit in France.

President Barack Obama arrives today in the resort city of Cannes for discussions on Europe’s financial rescue plan with U.S. standing diminished on the international economic stage.

Obama, who enjoyed greater appeal in many European nations than at home even at the height of his popularity and who as a presidential candidate attracted an estimated 200,000 people to a speech in Berlin, is hampered in shaping the continent’s response by lingering resentments over the U.S. origins of the 2008 financial crisis, a sluggish domestic economy and political gridlock in Washington.

“U.S. leadership, which in the past might have been helpful in sort of pulling the Europeans together, has eroded,” said Sebastian Mallaby, a senior fellow at the Council on Foreign Relations in Washington. “You’ve got a world where the natural postwar leader has kind of got its hands tied behind its back, and the world ain’t doing too well as a result.”

Stocks around the world plunged after Greek Prime Minister George Papandreou’s Oct. 31 call for a referendum on a European Union bailout plan provoked concern the agreement would unravel and push Greece into a disorderly default that could spread to other nations.

Market Rebound

Markets rebounded yesterday, with the Standard & Poor’s 500 Index climbing 1.6 percent to 1,237.90 in New York after dropping 5.2 percent over the previous two days. The Stoxx Europe 600 Index ended up 0.9 percent.

The yield on the 10-year note was little changed at 1.99 percent after jumping 9 points earlier. The yield on the 30-year bond gained as much as 10 basis points before trading one basis point higher at 3.01 percent.

Treasuries have returned 8.8 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data.

A cascade of defaults that spread from Greece to other nations such as Portugal, Ireland, Spain and Italy would risk a financial panic and freeze in U.S. credit markets, as well as a surge in the dollar’s value that would raise the cost of U.S. exports, said Nariman Behravesh, chief economist for IHS Inc. (IHS), a forecasting firm in Englewood, Colorado.

Spread of Risk

He projects a 25 percent risk of a U.S. decline sparked by European defaults that sends the unemployment rate as high as 11 percent by the 2012 election.

MF Global Holdings Ltd. (MF)’s bankruptcy filing on Oct. 31 underscored the potential for contagion to spread across the Atlantic. The brokerage wagered $6.3 billion on European sovereign debt.

“It is amazing: There’s this huge thing going on and we have virtually no influence on it,” said Phillip Swagel, a professor at the University of Maryland in College Park and an assistant Treasury secretary under President George W. Bush.

The meeting of leaders of the 20 largest industrial and developing nations in Cannes comes a week after European leaders developed a broad plan to use leverage to increase a bailout fund to 1 trillion euros ($1.4 trillion), reduce Greece’s debt and boost bank reserves to head off the threat of a wave of defaults.

‘Stronger Position’

U.S. presidents possessed greater capacity to persuade foreign leaders to overcome differences during the late 1990s, when U.S. economic growth averaged more than 4 percent, or even in the middle of the past decade, when growth rates were in the 3 percent range, Swagel said. “You speak from a stronger position.”

American leadership is further undercut by blame some foreign leaders cast on the U.S. for the global recession that followed the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 and by the political standoff that brought the U.S. to the brink of a default on its debt just months ago. The tensions between Obama and congressional Republicans over taxes and spending are now standing in the way of meeting a $1.5 trillion debt reduction goal.

Political Parallels

The political difficulties European leaders have in overcoming domestic pressures to come together to meet the economic threat have a parallel in the U.S. partisan gridlock over debt reduction, Swagel said.

“In a sense, the president’s message to the Europeans is you guys know how to deal with the problems, you just have to act,” Swagel said. “They can turn around and say to him the same words in response.”

White House press secretary Jay Carney disputed the notion of diminished U.S. influence and said the administration brings to the meeting its experience in dealing with the 2008 crisis.

While the debt crisis is a “European problem that requires a European solution,” Carney said yesterday, “The United States is still the largest economy in the world.”

Obama and Treasury Secretary Timothy Geithner have pressed European leaders for months to move rapidly to address the debt crisis with decisive action.

In an essay published in the Financial Times the day after the European leaders’ deal was announced, Obama welcomed it as a “critical foundation on which to build” and urged them to include “a credible firewall that prevents the crisis from spreading.”

Financial Contributions

European leaders have been seeking financial contributions from foreign governments including China, Japan and Brazil to invest in the European Financial Stability Facility.

With Congress seeking to cut government spending and the bailout of banks in the U.S. still unpopular, Obama administration officials avoided questions about a potential U.S. financial commitment at a briefing for reporters Oct. 31. They said the International Monetary Fund, in which the U.S. is the largest shareholder, may assist.

“Fortunately, Europe has the resources and capacity to overcome these risks,” said Lael Brainard, undersecretary of Treasury for international affairs. “We’ll continue to support our Europe allies in their efforts to address this crisis, alongside the IMF and our G-20 partners.”

To contact the reporter on this story: Mike Dorning in Washington D.C. at mdorning@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.