By Neil Irwin and David Cho
Washington Post Staff Writers
Sunday, May 9, 2010; A13
MADRID -- With the European debt crisis putting the fragile global economic recovery at risk, Vice President Biden met Saturday with Spanish Prime Minister José Luis Rodríguez Zapatero and tried to walk a delicate line of encouraging a more forceful and unified response without appearing like a heavy-handed intruder into the continent's affairs.
"We agreed on the importance of resolute European action to strengthen the European economy and to build confidence in the markets, and I conveyed the support of the United States of America for those efforts," Biden said on the steps of Madrid's Moncloa Palaceafter a 40-minute meeting. About half the meeting was spent discussing economic matters, particularly the crisis that began with debt problems in Greece and now threatens Spain and other nations.
It was the most public step to date in a concerted effort by the Obama administration to nudge European leaders to respond more aggressively to the crisis -- an effort that has picked up steam in the past 10 days. It has come mostly in the form of private conversations between senior leaders, as the Americans have attempted the tricky task of pressing the Europeans to deal boldly with the burgeoning crisis without seeming pushy themselves.
Their effort could backfire if European leaders tune the Americans out or if their citizens come to blame the United States for unpopular decisions made in responding to the crisis. That could make it even harder for Europe's leaders to contain the crisis.
The meeting with Zapatero, who is also president of the European Union, comes at a crucial time. Finance ministers of E.U. member nations are meeting in Brussels this weekend to craft a plan to restore confidence that the debt of European nations is safe.
An announcement is planned Sunday of an emergency fund to stabilize the value of the euro, although the size and structure of that fund remained unclear Saturday.
"We will defend the euro, whatever it takes," European Commission President José Manuel Barroso of Portugal told reporters in Brussels on Saturday, according to Bloomberg News.
It follows the most dramatic week on global markets -- especially markets for European government bonds -- since the darkest days of the financial crisis.
The value of the euro fell steeply, and the rates that Spain, Portugal, Italy and Ireland must pay to borrow money surged, reflecting deepening fears that they might have Greek-style fiscal problems of their own. European stock markets fell 8.5 percent.
U.S. and European policymakers agree on the risks. If the crisis were to truly get out of hand, such that large and economically important nations such as Spain had difficulty rolling over their debt, the results could be catastrophic. It could cause a wave of new bank failures, lead to the dissolution of the euro as a common European currency and drive the world economy back into recession.
Many in the Obama administration's economic policy team have been disappointed that European governments did not act in a sufficiently unified and aggressive manner to contain the problems in Greece, instead dribbling out a plan after long delays, by which point debt fears had begun to spread to Spain, Portugal, Italy and Ireland.
Part of the difficulty for Europeans has been politics. French President Nicolas Sarkozy was disinclined to give a political boost to the International Monetary Fund's managing director, who has hinted that he might want to run against Sarkozy in the next election. German Chancellor Angela Merkel has important regional elections coming up, and bailouts of Greece or any other nation are highly unpopular in Germany.
As the Greek crisis emerged and spread over the past two months, economic advisers to Obama have monitored the situation and briefed the president on it regularly, but they largely assumed that European leaders would find a resolution, said people involved in the U.S. government response or in close contact with those who are.
That shifted last weekend, as officials in Washington became increasingly worried that Europe wasn't moving aggressively enough -- views they made known in a flurry of phone calls. That coincided with the IMF -- in which the United States is the largest shareholder -- agreeing to fund 30 billion euros of a 110 billion euro Greek bailout package announced May 2.
The principal officials involved are Lawrence H. Summers, the White House economic adviser; Timothy F. Geithner, the Treasury secretary; and Lael Brainard, the undersecretary of Treasury for international affairs. Federal Reserve Chairman Ben S. Bernanke has been in frequent contact with his counterparts at the European Central Bank and Bank of England, and has a particularly close relationship with Mervyn King, who heads the British central bank.
A common feature of financial crises is that, because they are fueled by seemingly irrational fear and panic, more dramatic action can be required to combat it than straightforward economic logic would suggest. It was a lesson U.S. policymakers learned during their response to the financial crisis of 2007 to 2009, in which they took a series of steps to try to prevent a recession and financial collapse -- but continually found markets moving faster than they did.
Ultimately, it was only once the government pulled out every tool at its disposal -- and some previously unknown, such as the $700 billion financial bailout -- that the crisis was contained.
The American officials still view the Greek crisis as fundamentally Europe's problem to deal with, even as they offer more advice to their counterparts across the Atlantic. The risk of becoming too actively engaged in a financial crisis an ocean away was shown in the East Asia crises of 1997-98, when the IMF and U.S. leaders were vilified in Thailand, Indonesia, Korea and elsewhere for demanding big budget cuts in the nations receiving aide.
The key U.S. officials involved then: Summers, who was deputy Treasury secretary; and Geithner, who was Treasury undersecretary for international affairs.