Obama Heads to G-20 With Few Tools to Stem Euro Crisis

When President Barack Obama meets with leaders of the world’s largest economies next week, he’ll confront one of the biggest threats to his re-election.

Europe’s sovereign debt crisis, which Obama has called the “cloud” hanging over the U.S. economy, will be the central topic for the Group of 20 nations summit next week in Los Cabos, Mexico. Yet U.S. officials said they don’t expect the meeting to result in significant progress toward a resolution.

The G-20 meets June 18-19, one day after Greek elections that may determine that country’s future in the euro region and as global markets look to Europe’s leaders for clearer signs of how they move forward. A failure to stem the crisis would add to economic uncertainty in the U.S. at a time when Obama and his presumptive Republican rival, Mitt Romney, are entering intensifying their campaigning.

“Obama is running both against Europe as well as” Romney, said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “He’s in a bind.”

The U.S. enters the G-20 summit from the position of an outside adviser: administration officials can give encouragement and provide suggestions on Europe’s crisis, yet even Obama has said a resolution is up to the Europeans.

Position of Weakness

“When he walks into the room, President Obama will have one objective: ring-fencing the European crisis, avoiding spillovers to the U.S. economy that could prevent him from getting re-elected,” said Domenico Lombardi, a senior fellow at the Brookings Institution in Washington. “He will do that from a position of weakness because he doesn’t have any direct card to play.”

Treasury Secretary Timothy F. Geithner underscored the U.S. position on the sidelines in European talks.

“This is something they can manage,” he said of euro zone leaders in a June 13 address in Washington. “I think they made the choice, that fateful choice, that they’re going to do whatever it takes to make Europe work.”

Obama has publicly pressed Europe to take decisive action to stimulate growth and conducted scores of phone calls with German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and U.K. Prime Minister David Cameron.

‘Herculean Task’

Merkel called finding a solution to the crisis a “Herculean task.” In a speech to parliament yesterday in Berlin, she said, “Germany’s power is not infinite” and rebuffed leaders who are looking to the region’s biggest economy to underwrite joint euro-area debt.

Europe’s turmoil this week forced Spain to ask for a bailout of its banks that may run as high as 100 billion euros ($126 billion), making it the fourth and largest euro-zone economy to seek aid. The record yield on Spanish bonds has fueled speculation the world’s 12th-biggest economy may need a full rescue.

Bank of England Governor Mervyn King said yesterday that more economic stimulus may be needed because of “signs of a deterioration in the outlook, especially in world markets.”

The G-20 meeting will be focused on pressing Europe toward a consensus for a meeting of euro zone leaders later this month, said Mike Froman, Obama’s deputy national security adviser for international economics. Germany, France and Italy, the three biggest euro zone economies, and the U.K. will be the only European countries represented at the summit.

Unfinished Work

European leaders “recognize that there’s still work to be done,” Froman said today at a briefing. “Los Cabos will not be the final word on the euro zone.”

Obama hasn’t scheduled any separate meetings with the European government chiefs at the summit. He will have individual talks with Russian President Vladimir Putin and Chinese President Hu Jintao.

As the crisis in the 17-nation currency union continues to unfold, indicators signal the U.S. economy may be cooling. More Americans than forecast applied for unemployment insurance payments last week with claims for jobless benefits rising by 6,000 to 386,000 in the week ended June 9. The Commerce Department reported yesterday that retail sales in the U.S. fell in May for a second month. Employment growth has waned compared with its pace earlier this year, and the jobless rate in May rose for the first time in 11 months, to 8.2 percent.

Candidate Speeches

The prominence of the economy in the presidential election was illustrated yesterday when Obama and Romney delivered speeches minutes apart in the swing state of Ohio to outline their different visions of how to accelerate growth.

Obama used Europe as a counter example for his policies.

“The economies of many European countries still aren’t growing,” he said in Cleveland. “But here in the United States, Americans showed their grit and showed their determination. We acted fast.”

Romney, in Cincinnati, accused of Obama of adopting European positions on government spending that will lead the U.S. “to chronic high unemployment, like Europe has, low wage growth, like Europe has, and potential fiscal calamity, like we’re seeing at the doorstep of Europe today.”

Obama has limited options at home in pursuing his own economic policies. His prescription of more stimulus to boost U.S. growth --similar his suggestions for Europe -- has been rejected by Republicans in Congress. Most of the $447 billion package of tax incentives and spending that he proposed last September has been stalled.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net

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

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