Barack Obama’s reelection may well depend on stimulus. Not the stimulus bill that passed Congress in 2009. Or the monetary injections administered by the Federal Reserve. This stimulus won’t even be debated in Washington. Obama’s reelection hinges on whether 17 Eurozone nations can band together to deal with a financial crisis threatening to tear apart Europe’s common currency and drag the world into another recession.
For the last two years, European nations have addressed their debt crisis through austerity: tightening their belts and slashing once generous benefits. Greece is ground zero for the crisis. After spending lavishly on the Olympics and giving its public employees a 50% wage raise between 1999 and 2007, Greece’s debt is now 177% of its gross domestic product. An agreement late last year erased half of Greece’s debt, but the rest must come from changes within the country. Turning an entire culture on a dime is not easy and the Greeks have rebelled. Elections held last month resulted in a stalemate: no party won enough support to form a government and Greeks must go back to the polls next month.
As Greece falters, the odds that it will be forced to leave the Eurozone and return to its original currency, the Drachma, increase. If Greece goes, credit markets could seize up and other heavily indebted European countries such as Spain, Portugal and Ireland could follow it into default. There’s no telling how exposed U.S. banks are to European debt and without another bailout – let’s face it, it’s unlikely that the current U.S. Congress could muster the political will to pass one even in the face of a depression – the U.S. economy could be dragged down with Europe.
It is this nightmare scenario that had President Obama brow beating German Prime Minister Angela Merkel, leader of Europe’s richest country and largest economy, at the G8 summit in Camp David and at the NATO meeting in Chicago this week. He needs her to get away from austerity and start looking at stimulus – ok, stimulus is a dirty word these days, everyone now calls it “growth”, even Mitt Romney. “Ultimately, what I think is most important is that Europe recognizes this euro project involves more than just a currency, it means that there’s got to be some more effective coordination on the fiscal and the monetary side and on the growth agenda,” Obama told reporters in Chicago. “Of course, they’ve got 17 countries that have to agree to every step they take. So I think about my one Congress, then I start thinking about 17 congresses and I start getting a little bit of a headache. It’s going to be challenging for them.”
In the last three years, the crisis has cost leaders in Britain, Italy, Ireland, Denmark, Spain, Portugal and, most recently, France, their jobs. Merkel is one of the few European heads of state to have survived the storm and, if state elections last week in Germany were any indication, she may fall next year. The upcoming German elections have made her loath to flip flop on her policies and pursue growth measures. But that is exactly what, not just Obama, but newly elected French President Francois Hollande, Spanish Prime Minister Mariano Rajoy, Italian Prime Minsiter Mario Monti, former Greek Finance Minister Evangelos Venizelos, European Council President Herman Van Rompuy, British Prime Minister David Cameron and European Commission President Jose Manuel Barroso are encouraging her to do.
Hollande, in particular, has been pushing the idea of eurobonds, which would essentially pool European debt, ahead of Wednesday’s informal European Union meeting and next week’s more formal summit. Others, like Spain’s Rajoy, say they want more immediate stimulus to help insulate against the shock of a potential Greek default if the elections produce an anti-European government – or even another stalemate – next month.
Merkel is not a big fan of expanding eurobonds – currently there is a pilot program going with €230 million – as she feels it would reward the flagrant spending that got many countries into trouble to begin with. “Eurobonds at the present time would provide the wrong signal of low interest rates and remove the pressure for European economies to adjust,” Steffen Kampeter, Germany’s deputy finance minister told reporters on Monday. “I think it is the wrong time for such a remedy, with the wrong consequences.”
There are other tools available: A hodgepodge of smaller measures such as investing more money in the European Investment Bank, redirecting unspent European Unions funds to fight unemployment, investment in green manufacturing projects, inking free trade deals or imposing a financial transaction tax – a move the British government, as home to the bulk of Europe’s market trading, vehemently opposes. Germany argues that a move earlier this week by one of its largest unions to raise wages by 4.3%, which will produce a ripple effect for millions of German workers, will act as a stimulus. But these small moves aren’t exactly what Obama was hoping for.
“One of the things we were able to do was to act forcefully to solve a lot of these problems early, which is why credit markets that were locked up started loosening up again. That’s why businesses started investing again. That’s why we’ve seen job growth of over 4 million jobs over the last two years. That’s why corporations are making money and that’s why we’ve seen strong economic growth for a long time,” Obama said at his Chicago press conference. “And so, acting forcefully rather than in small, bite-sized pieces and increments, I think, ends up being a better approach, even though obviously we’re still going through challenges ourselves.” If he thought getting his stimulus bill through Congress was difficult, getting one through Brussels is proving to be 17 times harder.