In euro crisis, U.S. lessons unlearned
By Howard Schneider,
U.S. officials quickly poured trillions of dollars into an array of programs to counter the country’s financial crisis in 2008 and 2009, often breaking the boundaries of conventional policy. By 2010, less than three years after the first hints of trouble at the Bear Stearns investment company, the economy was growing again.
By contrast, European leaders have taken a cautious, incremental approach to their financial crisis, and now, as the euro zone completes the third year of economic travail, a turnaround is nowhere in sight. Europe’s economy has stalled, threatening to become a prolonged drag on the wider world economy.
Decisions made more than two years ago, including the establishment of a half-trillion-dollar bailout fund, have yet to be carried out as political and legal wrangling continue. Basic choices about the structure of the currency union have yet to be made, as advocates for centralized control over bank regulation and government tax and spending policies clash with skeptics who fear the loss of sovereignty in the euro zone’s 17 member nations. Major resources, including those of the European Central Bank, remain at least partially sidelined as officials continue to debate the guidelines for using that money to help rescue flagging governments.
Talks this month and next may provide another increment of progress. A meeting of the ECB on Thursday may give insight into the central bank’s plans, for example, and a German court ruling expected next week may move the bailout fund a step closer to reality.
But there is little expectation of a decisive turnaround, and Europe’s agenda for the coming weeks sounds disturbingly like its agenda from the first days of the crisis: whether a bailout fund complies with European law; how much the ECB should do to help euro-zone governments; whether the Spanish and Italian governments can avoid a bailout; whether Greece can make the deficit cuts needed to keep its troubled rescue program on track or perhaps be forced to drop the euro.
“It is very hard to feel at all confident about where this is headed,” said Jared Bernstein, a former Obama administration economic adviser who is a senior fellow at the Center on Budget and Policy Priorities.
In the United States, the scope and scale of the different programs proved critical to restoring confidence. The Fed’s Term Asset-Backed Securities Loan Facility quickly pulled investors back to the markets for consumer and other loans with the promise of virtually open-ended financing. When banks stumbled, even healthy ones were forced to take a fast injection of federal bailout loans to build faith that the system had the funds to operate.
Despite years of diplomacy in Europe and a series of bailouts for struggling governments, the region’s response to the mounting debt crisis has failed to meet its most important goal of restoring confidence in the future of the euro zone. The efforts, short on money and tangled in conditions, have failed to convince investors and the rest of the world that euro-zone nations, whether small ones such as Greece or large ones such as Spain, will be able to pay their bills and will not decide to drop the currency.
Bernstein said that although some U.S. crisis programs were unpopular, the political constraints facing Europe are far more complex.
“Think about how the politics would have gone if we were bailing out Mexico and you get a sense of the challenges that policymakers are facing over there,” Bernstein said.
The U.S. economy still faces enormous hurdles, including the massive federal debt and the “fiscal cliff” of sharp government spending cuts and tax increases scheduled for the end of the year. Nor has the United States figured out how to generate middle-class jobs in an age of globalized manufacturing and service delivery. Yet, since 2010, the U.S. economy has added several million jobs and stabilized key financial markets. In the euro zone, meanwhile, employment has been flat, the banking system remains under stress, and a new recession has taken hold.
Jerry Tempelman, senior research analyst with Moody’s Analytics Capital Markets Research Group, said European leaders should be given credit for navigating their problems without allowing the kind of financial upheaval — notably the fallout from the collapse of the Lehman Brothers investment bank in October 2008 — that prompted U.S. officials to shift into high gear.
Investors have shed holdings and reshuffled money around the region in destabilizing amounts, and an event once considered potentially cataclysmic — steep losses imposed on holders of euro-zone sovereign bonds, issued by Greece — passed with little market fallout.
Coming on the heels of the U.S. crisis, which also rattled European banks and left governments deeply in debt, some nations had little room to respond and little patience with neighbors that needed help.
“These are different crises that are all coming to a head at the same time,” Tempelman said.
It has often been the case that, with no single “decider,” Europe’s protracted political wrangling has frustrated its allies, including U.S. officials. Yet, in this instance, even central power brokers such as German Chancellor Angela Merkel and ECB President Mario Draghi have seemed of two minds — pronouncing the euro irreversible and promising to do “whatever it takes” to make that so, then limiting what they were willing to do. The central question remains unanswered: Whether the capital flight, poorly organized economies and other problems pulling the euro zone apart can be overcome by the forces pushing toward more European integration. That requires trade-offs that no one has been able to convincingly engineer between the measures needed to generate better economic performance in some nations, the promise of more aid from others and a surrender of sovereignty to a central authority.
Those aren’t easy choices, requiring the type of consideration that in a U.S. context might be akin to amending the Constitution. But if the meltdown in the United States taught any lessons about crisis management, Mark Zandi, chief economist at Moody’s Analytics, and Princeton University’s Alan Blinder wrote in a 2010 study, it is the importance of moving fast and in a way that registers on the ground.
“If policymakers had not reacted as aggressively or as quickly as they did, the financial system might still be unsettled, the economy might still be shrinking, and the costs to U.S. taxpayers would have been vastly greater.”