Merkel Pressed by Obama to Take Lead in Europe Debt Crisis

German Chancellor Angela Merkel is heading home with a message from President Barack Obama to take the lead in managing Europe’s debt crisis.

While hosting Merkel for the highest-profile visit of a German leader to the White House in 16 years, Obama made it clear he’s looking to policy makers in Europe’s largest economy to prevent an “uncontrolled spiral of default” in countries such as Greece to avoid “disastrous” harm to the U.S. economy.

“We think that America’s economic growth depends on a sensible resolution of this issue,” Obama said at a joint news conference with Merkel in Washington yesterday. Merkel, while saying it is in Germany’s interest to help debt-laden countries, stuck to her stand that such countries must commit to becoming more competitive in return.

Their remarks underscored the differing agendas as both countries pledge to support action to avoid the euro area’s first default, more than a year after bailing out Greece in the debt crisis that has led Ireland and Portugal to seek international aid.

“If the euro as a whole is in danger, it’s in Germany’s interest -- and in every country’s interest -- to help,” Merkel said. “At that point, we will of course take action, but we will act in a way that’s sustainable.”

Obama said Greece will need private investment and “structural reforms” to make it more competitive and more transparent in its economy.

Backstopping

“But given their level of debt, it also means that other countries in the eurozone are going to have to provide them a backstop and support,” Obama said. Germany will be a “key leader” in that process, he said.

While the European debt problems have not been a significant drag on the U.S. economy this year, a crisis provoked by a default on sovereign debt could plunge the U.S. back into recession, said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York.

“We believe Europe will continue to find short-term patches for the situation there,” Feroli said. “If we’re wrong, the U.S. expansion could be at risk.”

While prodding Germany to take a leading role, Obama expressed sympathy for Merkel’s effort to convince skeptical German voters of the need for further aid.

“The politics of it are tough,” he said. He pledged the U.S. would “cooperate fully,” including through the International Monetary Fund, which has provided one-third of the rescues for the euro area. Merkel pressed for IMF involvement last year as Greece slid toward its bailout.

Debt-Holders

Obama also suggested that holders of Greek debt “have to make some decisions” about whether to work with euro-area governments to manage the debt, taking up a point pressed by German Finance Minister Wolfgang Schaeuble.

Bondholders must contribute a “substantial” share of a second aid package for Greece, Schaeuble said in a letter to European Central Bank President Jean-Claude Trichet and fellow euro finance ministers on June 6.

Maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy, Schaeuble wrote in the letter, which was provided to Bloomberg News and reported earlier by the newspaper Die Welt.

The German stance clashes with the position of European Commission officials and the ECB opposing anything beyond a voluntary rollover of debt. A swap offering investors terms that are “worse” than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said yesterday.

The euro climbed 0.8 percent to $1.4688, the strongest since May 5.

U.S. Economy

Obama said he wasn’t concerned that the U.S. would experience a double-dip recession, though said “we’ve still got some enormous work to do” to create enough jobs to make up for the more than 8 million lost during the recession.

The U.S. Labor Department reported June 3 that job growth slowed to 54,000 in May, down from 232,000 in April and the smallest gain in eight months. The unemployment rate rose to 9.1 percent, the highest level this year. It was the latest economic indicator suggesting the nation’s recovery from the worst recession since the 1930s has hit a soft patch.

Obama said consumers and markets are “still skittish” as a result of the recession, and any economic data suggesting a slowdown affects confidence and expansion.

No Panic

“Our task is to not panic, not overreact; to make sure that we’ve got a plan, a path forward in terms of how we make our economies competitive,” Obama said. That includes bringing down the nation’s debt while still maintaining spending in crucial areas such as energy research and education, he said.

Feroli attributes the weakening in the U.S. economy during the first half of the year to high gasoline prices and disruptions from the Japanese earthquake. He forecasts that the growth rate will rise to 3 percent during the second half of the year.

The two leaders spoke before a state dinner in Merkel’s honor in the White House Rose Garden. The guest list included government officials from both countries and business leaders such as Robert D. Hansen, chief executive officer of Dow Corning Corp., and Google Inc. Chairman Eric Schmidt.

Medal of Freedom

At the dinner, Obama awarded Merkel the Presidential Medal of Freedom, the country’s highest civilian honor. Previous recipients of the award include investor Warren Buffett, civil rights figure Rosa Parks and one of Merkel’s predecessors as chancellor of Germany, Helmut Kohl. In his toast, the president recalled Merkel’s upbringing in communist East Germany and her political career after East and West Germany were reunited in 1990.

“Tonight we honor Angela Merkel not for being denied her freedom, or even for attaining her freedom, but for what she achieved when she gained her freedom,” Obama said, highlighting her rise to become Germany’s first female chancellor and an “eloquent voice” for human rights.

The menu included vegetables and herbs grown in the first lady’s garden on the executive mansion’s South Lawn. The main course was a petite filet with Maryland crab ravioli served on a bed of wild ramp puree from West Virginia. The dessert is German: apple strudel served with schlag, an unsweetened whipped cream.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net

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

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