White House Says Europe Crisis May Harm U.S. Economic Recovery

President Barack Obama is keeping a close eye on Europe’s debt crisis and its potential to harm the U.S. economic recovery, White House spokesman Robert Gibbs said today.

“It has affected our economic recovery,” Gibbs told reporters at a White House press briefing, noting the impact Greece’s budgetary collapse “had on our recovery last spring.” He said the European Union needs to address the budget woes plaguing Ireland, Greece, Spain and Portugal because “they’re going to affect more than just the continent.”

The U.S. economy grew 5.0 percent in the fourth quarter of 2009 and 3.7 percent in the first quarter of 2010, before slowing to a 1.7 percent second-quarter pace as the EU weighed its rescue options. In May, the EU and the International Monetary Fund established a 750 billion-euro ($984 billion) fund after Greece’s near-default threatened the survival of the euro.

Markets are now weighing whether other countries will need rescues and how that might affect the U.S. economy, which posted 2.5 percent growth in the third quarter. Speculation about a larger effort to end Europe’s debt crisis helped drive stocks higher today, sending U.S. benchmark indexes to their biggest gains in three months.

“It bears watching because we understand the impact,” Gibbs said. He said Obama receives regular updates on the debt crisis and that the Treasury Department is monitoring conditions.

Stocks Rise

The S&P 500 gained 2.2 percent, the most since Sept. 1, as 483 of its stocks advanced as of 4 p.m. in New York. The MSCI Emerging Markets Index jumped 2.2 percent for its biggest gain since Aug. 2. The euro rebounded above $1.31 and Spanish 10-year bonds snapped an 11-day drop, while the rate on 10-year Treasury notes increased 17 basis points to a four-month high of 2.97 percent. Oil and copper advanced more than 3 percent.

The U.S. economy may have enough momentum now to avoid being sidetracked by the latest European concerns, said Drew Matus, senior U.S. economist at UBS Securities in Stamford, Connecticut.

“It should prove sufficient to weather some headwinds, wherever they may emanate from,” Matus said in an e-mail. “We have had and continue to have a 2.7% growth outlook for 2011 led by reasonably healthy consumption.”

Berlin Talks

Lael Brainard, the undersecretary for international affairs, was in Madrid today as part of a three-city European visit that also includes talks in Berlin tomorrow and in Paris on Dec. 3. Her visit comes amid renewed concern that Europe’s crisis may spread beyond Greece and Ireland, two countries that already have accepted bailout packages, to Spain and Portugal.

Spain and Portugal will likely follow Ireland in tapping the EU’s fund, Mohamed El-Erian, the chief executive officer at Pacific Investment Management Co., said yesterday, and Standard & Poor’s said it may cut Portugal’s debt ratings.

The IMF is one of the “few instruments” available to help stem the debt crisis, said Edwin Truman, former director of the Federal Reserve Board’s international finance division and a senior fellow at the Peterson Institute for International Economics in Washington. He said the IMF isn’t likely to run out of money in the short run.

“There are those who argue that the IMF has already been too generous to the Europeans,” Truman said. “Maybe yes or maybe no, but it is best not to keep score if the goal is to preserve the global recovery.”

The U.S. isn’t discussing an extra commitment of money from the IMF to Europe’s financial-rescue fund, a U.S. official in Washington said today. An IMF spokesman declined to comment.

Containing Crisis

The U.S. has urged the EU to focus on containing the crisis and to postpone talk of policy changes that could affect short-term investor confidence, such as bondholder losses that may be required for taxpayer bailouts after 2013 and other medium-term restructuring conditions.

ABC News reported that Geithner acknowledged some risk of a double-dip recession, largely because Europe is currently “a mess,” in a White House meeting yesterday with Republican and Democratic congressional leaders.

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