Subcommittee hears how European debt woes highlight US weakness
Greek sovereign debt problems likely will continue to roil global markets in the months ahead, but the United States could help calm international financial unrest by getting its own house in order, economic experts said Wednesday before a Senate subcommittee. A credible plan from the congressional super committee, which has a Nov. 23 deadline for a deficit-reduction proposal, would help stabilize global markets, according to Bruce Stokes, senior transatlantic fellow for economics at the German Marshall Fund of the U.S. But he and others testifying before the European affairs subcommittee of the Senate Committee on Foreign Relations gave decidedly pessimistic views of the eurozone crisis. Panelists noted the International Monetary Fund's unwillingness to commit additional funds to address the crisis and noted that few countries "relish making concrete commitments in the near future." The current muddle-through approach in Europe creates negative strategic implications for the United States, said David Gordon, head of research and director of global macro analysis at Eurasia Group. In the past, the United States would have built multilateral coalitions to get out ahead of the crisis, but it lacks the international political and economic power it once held, Gordon said. European nations are growing less capable and less willing to partner with the United States on international issues, despite like-minded interests, he said. Treasury Secretary Timothy Geithner's recent pressure for more action from the Europeans has begun to work, but the region is accustomed to a slower pace, and the crisis is likely to "speed up beyond Europe's ability to handle it," Gordon said. Greece Prime Minister George Papandreou's surprise call for a referendum on the Greek bailout plan threw another wrench into the markets and a no-confidence vote scheduled for Friday casts doubt on his ability to lead the country. Gordon told subcommittee members he expects a disorderly resolution of the debt crisis — until or unless Europe puts a better deal for Greece on the table. "Is this going to end with a bang or a whimper?" he asked. If it ends in a bang, it will be "very, very bad for the U.S." Gordon predicted additional rounds of discussions in the coming months over the Greece rescue plan before all is said and done. Desmond Lachman, resident fellow at the American Enterprise Institute for Public Policy Research, said Greece's ratio of debt to gross domestic product was initially estimated by the IMF to peak at 130% but now is expected to peak at 180% to 200%. If there is no debt restructuring and no currency devaluation, Lachman predicted that Portugal would be next in line for major financial problems. While the IMF sought to protect French and German banks holding Greek debt, it kicked the can down the road instead of immediately moving to strengthen the banks' balance sheets, Lachman said. "Eventually this debt has to be written down big time, and that will be a big hit to the European banks," he said. While the short-term economic outlook for Europe is "bleak," Jacob Funk Kirkegaard, research fellow at Peter G. Peterson Institute for International Economics, said he didn't expect the Greek referendum to go through nor did he expect Greece to leave the eurozone. Doing so would begin a slide "into de facto Third World status," he predicted. Kirkegaard called the European Central Bank the only big "bazooka" available to change the current negative trajectory. While it doesn't operate as a lender of last resort like the Federal Reserve, the ECB may need to take more action to avoid another "Lehman moment," he said, referring to the 2008 bankruptcy of Lehman Bros., a key catalyst in the U.S. financial crisis. For now, the ECB's role has been to put pressure on political leaders and on policymakers to lead the reforms. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.