U.S. Treasury Secretary Jacob J. Lew will prod European leaders to stimulate economic growth as they struggle to resolve the bloc’s debt crisis through budget tightening in the midst of a recession.
Lew will spend a day with European Union officials in Brussels and central bankers in Frankfurt today before heading to Berlin and Paris. A top court’s scrapping of austerity measures in Portugal, haggling over Greece’s rescue and further political deadlock in Italy have set up road blocks for euro finance ministers, who meet this week in Dublin.
An emerging recovery in the U.S. and a global effort to jump start growth through monetary measures may be weighed down by recession in the euro area, where unemployment has reached a record 12 percent. Last month’s fumbled bailout for Cyprus, which raised the specter of capital flight in Europe, sparked concern that the 17-member bloc won’t be able to exploit a market calm to exit the more than three-year-old debt crisis.
“The awkwardness with which they handled the Cyprus situation has got to have created a substantial sense of unease in Europe,” former Treasury Secretary Lawrence Summers said in an interview on Bloomberg’s “Political Capital with Al Hunt.” “That is something that I think is worth worrying about.”
The euro climbed 1.3 percent last week against the U.S. dollar, buoyed by an April 6 report showing U.S. job gains fell short of forecasts in March, rallying from the lowest level in more than three months amid concern over Cyprus. The single currency rose 0.4 percent to $1.2991 at the end of the week.
Lew will meet with European officials including EU President Herman Van Rompuy and Commissioner Olli Rehn, the bloc’s budget enforcer who has championed the German-led austerity-first strategy. He’ll hold talks later in Frankfurt with European Central Bank President Mario Draghi.
Officials in President Barack Obama’s administration, including Lew’s predecessor Timothy Geithner, in the past haven’t held back on criticism of a crisis strategy that’s relied on scaling back public budgets as a way to win back market confidence. At the Group of 20 summit in Los Cabos, Mexico, in June last year, Obama prodded leaders including German Chancellor Angela Merkel to stimulate the economy.
Lew will want to hear from euro officials about their plans to spur growth, a Treasury official speaking on condition of anonymity said on April 5. Financial instability in Europe remains a risk to the U.S., the official said.
The threat of instability, in the face of a pledge by the ECB to do everything necessary to preserve the euro, re-emerged last month after euro officials botched an initial plan to siphon money from every account holder in Cyprus to help pay for a bailout package for the Mediterranean nation.
The deposit levy sent markets reeling and prompted outrage in Cyprus, where lawmakers rejected it on March 19, forcing international creditors back to the negotiating table. A second plan leaves insured deposits under 100,000 euros ($130,000) intact, though raises the levy for some non-insured deposits.
Euro officials’ failure to recognize the impact of “the disastrous Cypriot idea of going after small depositors” signals a “degree of complacency with respect to the robustness of markets,” Erik Nielsen, chief global economist at UniCredit SpA, wrote in a note to clients today.
The region’s susceptibility to setbacks by its patchwork of actors was illustrated over the weekend when Portugal’s Constitutional Court struck down European-ordered austerity measures, including cuts in payments to state workers and retirees. The government in Lisbon condemned the decision as carrying ‘‘negative effects” for the country’s bailout.
Prime Minister Pedro Passos Coelho yesterday said he will cut spending more than originally planned this year to compensate for the fiscal consolidation blocked by the court. He ruled out further tax increases. The premier is already struggling against rising unemployment and lower demand from European trading partners as he reduces spending and raises taxes to meet the terms of the nation’s 78 billion-euro aid plan from the European Union and International Monetary Fund.
The court decision underscores a rising tide of resistance to austerity measures. Italian voters bridling under spending cuts and higher taxes repudiated the belt-tightening strategy in a February election that set up political gridlock in Rome, where officials are still unable to form a government.
“After post-election instability in Italy and a perilous precedent-setting bank bail-in in Cyprus, Portugal’s fiscal woes are the latest challenge to the stability in peripheral bond markets,” wrote Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London. “The risks in the eurozone have increased markedly over the past six weeks or so.”
The 17 euro-area finance ministers will meet on April 12 in Dublin. They’ll also discuss aid to Greece, where the sovereign- debt crisis erupted in October 2009.
The troika of international creditors -- the EU, ECB and the International Monetary Fund -- is still in talks with officials in Athens about the country’s next tranche of rescue aid. The European Commission said last week that officials will consider the impact on sovereign finances of a proposed merger between National Bank of Greece SA and Eurobank Ergasias SA (EUROB).
Commission spokesman Olivier Bailly said April 5 that he couldn’t confirm Greek media reports that the troika is blocking or slowing the planned merger between the two banks. The bank merger would receive extra layers of review linked to Greece’s 130 billion-euro second bailout, he said.
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