Obama Dueling Romney With Europe Debt Crisis as the Foil

Lobbyists, special-interest groups and Wall Street typically fill out the villain list for political candidates. Now they have a new foil: Europe.

The threat that the euro region’s sovereign debt crisis will stunt the U.S. economic recovery has made the continent a target for the campaigns of President Barack Obama and Republican candidate Mitt Romney.

Romney warns that Obama’s policies and spending will “take America on the path to Europe.” Obama offers the same caution about Romney’s approach, saying the Republican’s emphasis on austerity would result in economic stagnation as Europe is experiencing.

“Everyone wants to use Europe for their own domestic purposes right now,” said Ian Bremmer, president of the Eurasia Group, a research and consulting group in New York.

The political attack carries geopolitical risk for Obama. It may be viewed as criticism of German Chancellor Angela Merkel, Europe’s main advocate for austerity and the person Obama needs most as an ally to stem any contagion from the debt crisis. As a candidate who doesn’t hold government office, Romney has more flexibility in his political message.

Obama and former President Bill Clinton made numerous references to Europe during joint appearances at three fundraisers in New York on June 4 as they addressed the No. 1 issue in the presidential campaign: the U.S. economy.

Slowing Down

“The situation in Europe is slowing things down,” Obama told donors at the New Amsterdam Theatre. At the home of hedge fund executive Marc Lasry, Obama said that Romney and congressional Republicans favored an austerity plan that would “drastically shrink government,” hurting job growth and middle-income Americans.

“That is fundamentally different from our experience in growing this economy and creating jobs,” Obama said.

Where Obama was subtle, not drawing a direct line between Europe’s approach and Romney, Clinton was not.

The former president said Republicans were adopting “the European economy policy.”

“Who would have ever thought that the Republicans would embrace the austerity and jobless policies of what they used to derisively call ‘old Europe,’” Clinton told donors at the Waldorf Astoria hotel, referring to the Bush administration’s umbrage at European allies who didn’t embrace its post-Sept. 11 war policies. “I never thought I’d live to breathe and see, here they are saying, let’s do the euro zone’s economic policy - - they got 11 percent unemployment; we can get up there if we work at it,” he said, drawing laughter from the crowd.

European Outcome

Romney, meanwhile, is arguing that that the way to avoid a European outcome is to elect a new president.

“We have two courses we could follow. One is to follow in the pathway of Europe, to shrink our military smaller and smaller to pay for our social needs,” he said May 28 in San Diego. “They of course rely on the strength of America and they hope for the best. Were we to follow that kind of a course, there would be no one who could stand to protect us.”

Romney last year accused Obama of taking his political inspiration “from the socialist democrats in Europe.”

Obama has been citing the economic impact of the crisis in the 17-nation euro zone, as signs of a U.S. slowdown pose a bigger threat to his re-election. In separate phone calls yesterday and today, Obama spoke with Merkel, U.K. Prime Minister David Cameron and Italian Prime Minister Mario Monti.

They talked about the importance of strengthening “the resilience of the euro zone” to bolster growth in Europe as well as globally, White House press secretary Jay Carney said. He refused to say whether they agreed on any specific steps.

Europe’s ‘Cloud’

After the Labor Department reported on June 1 that U.S. payrolls expanded by 69,000 in May, fewer than the most pessimistic forecast in a Bloomberg News survey of private economists, Obama said that Europe’s leaders haven’t done enough to dispel “the cloud that’s hanging over from the Atlantic.”

Treasury 30- and 10-year yields reached record lows of 1.4387 percent and 2.5089 percent after the Labor Department report. They rose for a second day yesterday on speculation the slide won’t be sustained and conjecture European leaders may move to stem the debt crisis damped demand for safety.

Borrowing Costs

The benchmark 10-year note yield climbed eight basis points, or 0.08 percentage point, to 1.65 percent at 2:08 p.m. in New York, according to Bloomberg Bond Trader prices. The 30- year bond yield increased seven basis points today to 2.71 percent.

Germany also has seen borrowing costs fall as investors sought the nation’s debt as a haven from Europe’s financial turmoil. The German 10-year bond yield was 1.22 percent at 4:08 p.m. London time after hitting an all-time-low of 1.127 percent on June 1.

Obama has to balance politics with the need to influence those leaders. He risks alienating Merkel at the very time he is asking her to ease up on her austerity push and sign off on more spending that could insulate the U.S.

“What does he gain by offending Merkel? Nothing,” said Nariman Behravesh, chief economist at forecaster IHS Inc. (IHS) and a former Federal Reserve official. “So what he’s really trying to do here? He’s trying to play it both ways. He risks a negative reaction on Merkel’s part, which would be counterproductive.”

The debate over stimulus versus austerity has dogged Obama throughout his presidency, as the U.S. recovers from the worst recession in more than seven decades. Romney is making it one of the central arguments of his campaign.

Stiglitz Analysis

Obama’s approach was endorsed this week by Nobel Prize- winning economist Joseph Stiglitz.

History shows that the adoption of fiscal austerity when an economy is weak can have disastrous consequences, as happened in the U.S. in 1929 on the eve of the Great Depression, Stiglitz told Bloomberg editors and reporters in New York yesterday.

Romney risks making that same sort of mistake by backing a plan to tighten federal spending, said Stiglitz, who was chairman of Clinton’s Council of Economic Advisers from 1995 to 1997.

The next several weeks are critical for the global economy, with a second round of elections in Greece and a Group of 20 summit in Mexico this month. Finance ministers and central bank governors from the world’s leading economies today agreed to coordinate their response to Europe’s financial crisis on a conference call that dealt with Spain and Greece.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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