A flurry of meetings between European Union officials and principals of the U.S. government came on the heels of fresh warnings Monday that the European debt crisis threatens to spark a global recession.
Senate Majority Leader Harry Reid (D-Nev.) and senators from both parties met with officials from Brussels to discuss the evolving crisis, signaling a level of engagement that is a shift from the low-key approach Congress has adopted on the matter.
While U.S. markets surged Monday on the strength of holiday shopping, a sense of urgency to the bilateral talks was strengthened by a pair of gloomy reports.
The Organization for Economic Cooperation and Development (OECD) slashed its expectations for global economic growth, saying Europe’s debt woes threatened to throw the entire world into another recession.
Separately, Moody’s Investors Service warned the situation was worsening for all European nations, leaving the EU’s monetary union on the brink of falling apart.
The annual U.S.-EU summit is typically a routine affair, but the circumstances surrounding Monday’s meetings lent a heightened atmosphere to the event.
The OECD, an international economic group based in Paris, warned that the world’s economy had “deteriorated significantly,” due primarily to the growing problems in Europe.
If those sovereign debt problems are not dealt with soon, the looming $1.2 trillion in automatic spending cuts in the U.S., triggered by the deficit supercommittee’s failure to reach a deal, “could tip the [U.S.] economy into a recession,” the OECD said.
A worst-case scenario would have “highly devastating outcomes” for the global economy, especially the U.S., which would see “marked declines” in economic activity, the OECD said.
U.S. and European officials acknowledged in a joint statement that the global economy had entered “a new and difficult phase,” but welcomed European efforts to stifle the debt crisis, as well as American attempts to get its fiscal house in order.
While Europe’s debt crisis took center stage, Obama and the EU officials also covered other ground, from global trade to non-economic matters such as Iran’s nuclear program and climate change.
But both the OECD and Moody’s noted that Europe’s challenges are inherently political, and on both sides of the Atlantic, politicians have struggled to compromise over new taxes and entitlement cuts that might help relieve long-term fiscal problems.
Late Monday afternoon, the Fitch credit rating agency announced it was downgrading its outlook on the U.S. AAA credit rating to negative, a reminder of the debt problems U.S. policymakers so far have been unable to fix.
Fitch said that if lawmakers adopt a “credible, medium-term deficit-reduction plan” sometime in 2013, it would relieve “downward pressure” on the nation’s credit rating. But if no such reforms come about, and the nation’s economy takes a turn for the worse, the likely result would be another downgrade for the U.S.’s once-sterling credit reputation.
The White House has consistently pressed European leaders to take strong, decisive action on its debt crisis, like the U.S. did during the financial crisis of 2008. Earlier in the day Monday, White House press secretary Jay Carney emphasized that Europe has the “resources and capacity” to deal with its problems, and it was a matter of finding the “force and decisiveness” to do so.
This tone from the U.S. has at times backfired in Europe, where policymakers think the U.S. should be focused on its own budget problems.
The meetings come amid growing concern that the U.S. economy, now finally back on relatively solid footing, could see itself dragged down by foreign problems.
For months, the stock market has hung on the latest headlines out of Europe, though stocks surged Monday on the back of reports from retailers that consumers spent a record amount over the Thanksgiving holiday weekend.
This has driven hopes that consumer spending — which accounts for about 70 percent of the economy — will be robust during the crucial holiday season.
Such a turnaround would be a boon for Obama, who faces 9 percent unemployment.
Reports that Germany and France were looking to exert more control over the debt crisis, coupled with rumors that the International Monetary Fund (IMF) was weighing a plan to bail out Italy, helped buoy the stock surge.
But unless Europe finds a solution to its debt problems, experts expect it to act as an anchor on the world’s economy for years.
The OECD said in its latest report that the U.S. economy will grow at a rate of less than 3 percent through 2013, while the nation’s unemployment will drop less than half a percentage point, to 8.6 percent, during that same timeframe.