On verge of another crisis, Geithner seeks economic stability in Europe

By Howard Schneider and Anthony Faiola
Washington Post Staff Writers
Thursday, May 27, 2010

FRANKFURT -- U.S. Treasury Secretary Timothy F. Geithner dined on Wednesday night with European Central Bank President Jean-Claude Trichet, a closed-door, no-public-comment session that placed the American official in the middle of an ongoing European debate: Which Trichet would show up?

Was it the Europe-only stalwart who resisted involvement of the International Monetary Fund in a recent rescue of Greece -- and arguably slowed the process as the country slipped deeper into crisis? Or was it the quick-response pragmatist who in recent weeks tossed core principles aside so the ECB could prop up its weakest member-states?

With Europe fighting through the most serious crisis in the euro's 11-year history, the role of Trichet and the ECB have come under scrutiny by critics who argue that a series of missteps and misstatements may have made matters worse -- and continue to shake confidence in Europe's response.

That lack of confidence sent the euro falling against the dollar for the third day, to $1.2178, on Wednesday. And the unease rippled through U.S. markets, with the Dow Jones industrial average closing under 10,000 for the first time in almost four months.

Britain has not adopted the euro, but its indebtedness remains a concern -- as does that of the United States. Geithner said the budget-cutting and economic growth initiatives being announced in European capitals were important "so that people can see you're committed to follow through."

The matter is of pressing concern to Geithner as U.S., European and other leaders try to craft new global financial regulations and keep a nascent recovery on track. Geithner swung through London and Germany on Wednesday -- a detour on his way back from China -- to meet his treasury counterparts and central bank officials. His visit is part of an Obama administration effort to ensure Europe's developing economic problems don't spiral into a worldwide crisis.

"What markets want to see is action," Geithner said in London after meeting with British Chancellor of the Exchequer George Osborne and Prime Minister David Cameron.

He said a new, nearly $1 trillion fund to aid financially troubled nations and stabilize the euro "has got the right elements," but markets now needed to be convinced that European nations have the wherewithal to trim deficits and restructure their economies to renew growth that is lagging behind the United States and the rest of the world.

On Wednesday evening Geithner met with Trichet in Frankfurt, where the ECB's headquarters is graced with a statue of the currency's trademark "E," a symbol devised as a sign of Europe's budding union. The session was kept closely under wraps by both sides, with only the two men in attendance, according to aides.

The meeting came at a sensitive time for the ECB and Trichet, a 67-year-old trained engineer who is now trying to resolve some of the euro's built-in stress points. The 16 countries that share the euro have a common policy on interest rates and other monetary issues that is set by the ECB, but behave like very different nations when it comes to taxation, spending and the structure of their economies -- an arrangement recognized as a potential problem since the euro's inception.

The crisis in Greece brought that tension to the fore when its high levels of debt threatened a default, began driving down the value of the euro, and pressed the issue of whether one euro-zone country's problems should be shared by the others -- whether the ailments of a weakened economy like Greece, in this instance, would be borne by a stronger one like Germany.

Trichet, an official in the French government during that country's painful economic restructuring in the 1980s, initially thought Greece's problems were comparatively small and could be handled internally, according to a senior IMF official and others familiar with Trichet's analysis.

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