Global economic struggles put pressure on political leaders
Anemic job growth in the United States, a business slowdown in Asia and the ever-intensifying debt crisis in Europe are raising pressures on political leaders to take new actions to bolster the world economy.
But it’s far from clear that they will be able to forge the necessary consensuses on exactly how to do that. In the United States, political deadlock in Washington has kept any significant economic measures from emerging from Congress, despite obsessive political rhetoric from Democrats and Republicans about the need to create jobs. In Europe, the policy gap remains wide between the austerity-minded leaders of Germany, the continent’s wealthiest country, and a raft of newly elected populists seeking to increase government spending in their ailing countries.
Attention is shifting to non-elected figures who may be able to affect the world economy. In Europe and the United States, markets are hoping that the central banks will act to loosen the availability of credit.
And in China, where the government reported last week that growth had slowed sharply, there is talk of a central-government stimulus plan.
The deepening anxiety about the economy was evident Sunday, when U.S. politicians and their allies took to the airwaves to stake out positions after Friday’s report that just 69,000 jobs were created in May and the unemployment rate climbed to 8.2 percent.
Obama’s advisers spent the day defending the president’s policies and reelection prospects. With only five months to go until Election Day, the campaign of former Massachusetts governor Mitt Romney, Obama’s GOP rival, pressed its claim that the administration’s policies were failing to create jobs and risking a return to recession.
“Nobody is happy with the rate of job creation today, but I believe without the policies the president put in place, we wouldn’t have even this level of job creation today,” said Steven Rattner on “Fox News Sunday.” Rattner oversaw the Obama administration’s rescue of the auto industry.
European leaders are running out of time to stabilize their economies. Billionaire investor George Soros, who made much of his fortune betting on economic trends, asserted this weekend that they have just three months to save the euro zone, the community of 23 nations that have shared a common currency for more than a decade.
An early test will come in just two weeks, when Greek voters head to the polls in a vote that will determine whether the country continues to take part in a rescue plan orchestrated by the European Union and International Monetary Fund. The plan calls for cuts in government spending and benefits, tough fiscal medicine that has sparked street protests.
If Greek voters elect politicians opposed to the plan, Greece may well be forced to abandon the euro, a cataclysmic event likely to roil financial markets and shake confidence in what once was seen as an important historic milestone — the creation of a single European economy.
Greece’s pullout from the currency union would probably set off financial-market speculation that other fiscally challenged European nations, including Ireland, Spain, Portugal and Italy, eventually could be forced out, too. Last week, worries about the currency union set off an exodus of capital from those countries into Germany, the United Kingdom, France and even the United States, driving interest rates down in those places to record levels. In Germany, the flood was so great that investors were paying for the privilege of keeping their money in German government bonds.
World markets are likely to continue their volatility this week. On Friday, U.S. stocks had their worst day of the year. The Dow Jones Industrial Average wiped out its 2012 gains, and the broad-based Standard & Poor’s 500 index is down nearly 9 percent in the past month. Markets all around the world are in decline, with many in bear territory.
While politicians feud, the best hope for support may come from central bankers, who operate independently of their governments.
In the United States, there is rising speculation that the Federal Reserve could launch measures to stimulate growth this month.
Chairman Ben S. Bernanke may provide a hint of new stimulus when he testifies Thursday before Congress. But that’s far from guaranteed; the Fed lately has been reluctant to undertake new action without a significant economic weakening.
Still, the developments “may be enough to tip the balance in favor of more immediate action,” economists at IHS Global Insight said Friday.
The Fed has a wide range of tools at its disposal. While officials merely project that they will keep interest rates near zero through late 2014, for instance, they could make a firm commitment to do so for an even longer period of time.
They could also buy hundreds of billions of dollars of U.S. government debt and mortgage debt, in an effort to further drive down interest rates to stimulate lending and economic activity – a policy known as “quantitative easing.”
But it is unclear how strong an impact such measures would have. Interest rates are already extremely low as foreign investors flock to the relative safety of Treasury bonds.
The rate on a 10-year Treasury bond fell Friday to an all-time low of 1.44 percent before settling at 1.45 percent.
While potentially slower economic growth in China and India may weigh on the U.S. economy, by far the largest challenge is what happens in Europe. The U.S. government has been continuing to push the Europeans to do more to stabilize their economies and forge a deeper economic union but has not had much success lately.
While it will be up to voters in Greece to decide which direction they want to lean, the burden is largely falling on German Chancellor Angela Merkel — head of the continent’s strongest economy — to decide whether she will entertain even more politically unpopular measures to aid slow-growing neighbors.
Soros, in a speech in Italy this weekend, predicted that although time is running short for Germany to agree to even more risky measures to save the euro, it will ultimately do so.
“The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany,” Soros said.
Stumbling block for Obama
The developments are casting a shadow over the Obama campaign’s hopes that the president will have the wind of a robust economic recovery at his back for his re-election run.
On Friday, the jobs report offered a near-definitive sign the economy has suffered a spring slowdown, repeating what happened in 2010 and 2011. The government last week also revised downward the economy’s growth rate in the first three months of the year to 1.9 percent from 2.2 percent.
Without a significant acceleration in coming months, which forecasters do not expect, the unemployment rate may well stay above 8 percent through the end of the year. Political scientists say that more important than the absolute level of unemployment is the broad trend — but now it is not even clear that will be improving much by November.
In full defensive mode on Sunday, Obama’s top campaign advisers reached back three years to highlight how the president rescued the auto industry and called on Congress to pass the president’s jobs proposals, which were unveiled in September.
“If you look at this jobs report, manufacturing is up, the best record in two decades, largely because of what the president did relative to the auto industry,” campaign adviser David Axelrod said on CBS’s “Face the Nation.” “What was down was construction, what was down was education — the very things the president has been trying to get Congress to act on were the things that were down.”
But manufacturing represented only 12,000 new jobs last month. And the president’s schedule this week underscores how the twin pulls of the campaign and the problems of the economy are dividing his attention. Obama has three campaign events in New York City on Monday and more in San Francisco and Los Angeles on Wednesday, but only one economic event scheduled: a stop in hard-hit Las Vegas on Thursday.
On Sunday, Romney’s advisers criticized Obama’s record, clearly relishing the political vulnerabilities created by the slowing economy.
“What we really have here is a deficit in leadership,” said Eric Fehrnstrom, a top adviser to Romney, on ABC’s “This Week. “This president came into office without any prior experience running anything. He never even ran a corner store. And I think it shows in the way that he’s handling the economy.”