US officials worried EU debt crisis could drag down the economy

U.S. lawmakers are worried the U.S. economy will be dragged down by problems in Europe despite a debt deal reached last week in Brussels.

The European debt crisis is expected to be the top agenda item for President Obama when he attends this week’s G20 summit in France, and members of Congress say Obama should pressure Europe to make good on its new deal.

ADVERTISEMENT
“One of the major obstacles that’s slowing down our recovery is Europe, and it’s been going on for over a year,” said Rep. Barney Frank (D-Mass.), the ranking member of the House Financial Services Committee. “We have a very important self-interest there.”

The continent’s protracted problems have helped stall out the U.S. economy, contributing to a lack of confidence that has businesses sitting on their reserves. It also is hurting the president’s re-election bid as he works to overcome an ailing economy that is being furthered weighed down by Europe.

“The thing people miss about Europe is that the largest trade in the world is not our trade with China, it’s actually the Transatlantic trade between the [European Union] and North America,” said Rep. Spencer Bachus (R-Ala.), who chairs that panel. He added that U.S. multinational companies reap over half their profits in Europe.

Even though the economy grew by a fairly healthy 2.5 percent in the third quarter of the year, European turmoil has waged a toll on U.S. financial markets, which in turn has weighed on the broader economy. On Tuesday, the Conference Board reported that consumer confidence levels had fallen to levels not seen since the financial crisis — even lower than in August during the debt limit fight.

However, financial markets breathed a sigh of relief Thursday, after EU leaders finally hammered out a broad deal that requires banks to shore up their capital and take a haircut on holdings of Greek bonds, while beefing up the EU’s bailout fund.

The president said the agreement laid a “critical foundation for a comprehensive solution,” and urged EU leaders to flesh it out and put it in place quickly.

But Europe is not out of the woods just yet.

After stocks spiked by over 3 percent Thursday, they treaded water Friday, amidst concerns that the agreement still needs to be properly implemented by over two dozen EU members in the coming weeks, or even months.

The deal serves as a backdrop to Obama’s trip abroad, and lawmakers are hoping he will stick with the message the White House has been sending to Europe throughout the crisis — be bold and act decisively.

Given the foreign nature of the problem, there is little direct action U.S. policymakers can take to address the situation. Instead, Treasury Secretary Timothy Geithner has made multiple trips to Europe to pressure leaders. While some Europeans leaders have bristled at such direct American pressure, lawmakers hope the president will maintain that tone.

“I think what Geithner is doing is very useful…urging them to move,” said Frank. “Our job is to say, ‘Hey look, you’ve got to do this,’ and to help put some pressure on them.”

Bachus said the White House has been delivering a “sound message” to European leaders.

From Washington’s perspective, America has experience it can bring to bear on Europe’s debt crisis. The U.S. tackled its own financial crisis in 2008 by taking swift broad action, and its European counterparts would do well to follow suit, policymakers say.

“When we faced a similar crisis, we took tough action, even though it was somewhat unpopular and politically we took some heat,” said Frank.

But while lawmakers want to see Obama push Europe towards a solution, they also are worried about potential weaknesses that could threaten America’s financial institutions or its taxpayers.

Bachus told The Hill that his committee has three times now tried to get the financial regulators to testify on what exposures the government or the nation’s financial system may have to Europe’s troubles. However, each time scheduling witnesses has proven difficult, frustrating the lawmaker.

“As part of our oversight function, we need to know these questions,” he said. “What we don’t know is if we’re making any obligations that could result in taxpayer losses.”

When Federal Reserve Chairman Ben Bernanke visited with Senate Democrats earlier this month, American exposure to Europe’s problems was a hot topic of conversation.

In public testimony, Bernanke has said American bank exposure to Europe’s most troubled nations — Greece, Spain and Portugal — is “quite minimal.” However, he did warn that a disorderly default by one of those nations could send shockwaves through markets that could reach American shores.

But Frank cautioned that pressing regulators like the Federal Reserve for detailed information about specific institutions could do more harm than good, especially since the crisis is still in flux.

“We’ve asked for a hearing on that. On the other hand, you don’t want to cause too much panic,” he said.

He added that, thanks to the Dodd-Frank financial reform law, the Fed’s moves eventually will be made public — something the central bank is well aware of.

For the time being, regulators seem content to monitor banks’ exposures to European assets, while encouraging them to shore up their books wherever possible.

“Our regulators are telling the banks, ‘Try and reduce your exposure,’” said Frank.