Alan Greenspan, a former Federal Reserve chairman, today compared Europe to a “leaking boat” and said political consolidation is the only solution to the region’s financial crisis.
“The problems in Europe are the fiscal deficits of all the various countries that are involved,” Greenspan said in an interview on CNBC television. “It’s like a leaking boat in which we keep bailing it out and we’re very pleased with ourselves that we’d be able to keep bailing it out. The problem is we haven’t fixed the holes yet.”
European leaders in Brussels this week held their 19th summit since the sovereign-debt crisis started more than two years ago. Euro-area nations granted immediate respite to the stressed bond markets of Spain and Italy, leaving investors looking to the European Central Bank to provide more lasting relief.
“The only solution to the European crisis is political consolidation of Europe. I think we’re gradually moving in that direction; in fact I know we are,” Greenspan, 86, said in the interview. “The only issue is, will we ever reach that?”
By addressing flaws in their bailout programs, moving toward a banking union and trying to break a negative loop between troubled sovereigns and banks, euro-area officials triggered the biggest rally in Spanish bonds and the euro this year.
Global stocks also surged the most this year and oil had its biggest gain since 2009 after European leaders reached the agreement that eased concern banks will fail.
The MSCI All-Country World Index climbed 3 percent, the most since November, while the Standard & Poor’s 500 Index advanced 2.5 percent to cap its best June since 1999. The euro appreciated 1.7 percent against the dollar and rallied as much as 2 percent, the most since Oct. 27. Spain’s two-year yield plunged more than a full percentage point.
Germany’s parliament approved the European Union’s fiscal pact and the permanent euro bailout fund with clear majorities as Chancellor Angela Merkel pledged solidarity and vowed to overcome the debt crisis.
“This is a signal of solidarity and determination, domestically as well as abroad,” Merkel told lawmakers today before the vote in Berlin. Passage is “a signal to overcome the European sovereign debt crisis in a sustainable way -- and a signal from us that Europe is our future.”
Greenspan said in the CNBC interview that in the U.S. the “fiscal cliff will be essentially kicked down the road, like the can. The reason basically is that nobody wants all of a sudden all of those items to hit the economy at the time.”
The term “fiscal cliff” refers to a number of major tax-and-spending changes that will take effect at the end of this year unless Congress acts. The George W. Bush-era income tax cuts will expire, as will a temporary cut in the Social Security payroll tax. About $1.2 trillion in automatic spending cuts over a decade will be poised to start, expanded jobless benefits will expire, and the government will approach the legal limit on federal borrowing.
“We’re not going to be hit by that,” Greenspan said. “Ultimately at the end of the day, something will be done.”
Inaction on Capitol Hill could push the U.S. economy into recession next year, the Congressional Budget Office said last month.