Uh-oh: "The eurozone crisis has led to the region’s economy contracting at the fastest pace for almost three years and sent German business confidence tumbling this month."

A man walks past a vacant building lot in downtown Madrid May 16, 2012. Spain's prime minister voiced concern about the state's ability to finance itself as fears mounted over a spread of the euro zone debt crisis. (SUSANA VERA/REUTERS)

The bad news keeps coming in FT Alphaville, where Paul Murphy notes that German bonds are looking eerily Japanese these days, and persists even once you leave the financial section: "The attempt by six world powers to persuade Iran to scale back its nuclear programme suffered a setback on Thursday when talks to defuse the crisis failed to make any progress," reports James Blitz.

Sorry I don't have better news for you this morning. On the bright side, it's Friday. And its a three-day weekend. And the Senate passed the FDA bill. And here's an adorable video of a kid hugging goats at the petting zoo because he thinks they're dogs. So at least I gave you that.

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RCP Obama vs. Romney: Obama +1.9%; 7-day change: Obama -0.5%.

RCP Obama approval: 48.2%; 7-day change: -0.2%.

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Top stories

1) The euro-zone economy contracted at the fastest pace in almost three years. "The eurozone crisis has led to the region’s economy contracting at the fastest pace for almost three years and sent German business confidence tumbling this month...Purchasing managers’ indices showed eurozone private sector economic activity contracting in May at the fastest rate since June 2009. France saw a particularly sharp contraction, but the German index also showed the eurozone’s largest economy had fallen into contraction territory. Separately, the Munich-based Ifo institute said its German business confidence index had tumbled from 109.9 in April to 106.9 in May, the lowest since November. The index saw a larger monthly drop last August, but otherwise the fall was the biggest since late 2008 when the global economy was reeling from the collapse of Lehman Brothers investment bank." Ralph Atkins in The Financial Times.

Big European fund managers are dumping euro assets. "Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil. The euro’s sudden fall this month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514...Amundi, Europe’s second-biggest private fund manager, and Threadneedle Investments, the big UK manager, have cut their exposure to the euro in recent days as frustration grows with political leaders’ efforts to resolve the crisis. US-based Merk Investments, the currency specialists, has cut all of its euro holdings in its flagship fund this month...Other big fund managers fear the likelihood of a so-called 'Grexit', in the event of Athens leaving the euro, has risen sharply in the past week." David Oakley and Alice Ross in The Financial Times.

2) The Senate overwhelmingly approved the FDA bill. "The Senate passed a major bipartisan bill on Thursday to prevent drug shortages and to speed federal approval of lifesaving medicines, including lower-cost generic versions of biotechnology products. A similar bill is on a fast track to approval in the House, perhaps as early as next week. President Obama, consumer groups and pharmaceutical companies strongly support the legislation. The measures reflect the government’s effort to keep up with new therapies developed during a decade of rapid progress in biomedical research. After months of legislative paralysis and political sniping, the sight of Democrats and Republicans working together on a significant bill was remarkable. The Senate vote was 96 to 1. The no vote was cast by Senator Bernard Sanders, independent of Vermont, who said the measure did 'far too little' to make drugs more affordable." Robert Pear in The New York Times.

3) Lending fell for the first time in almost a year. "Lending stumbled in the first quarter after nearly a year of growth, deepening questions about the recovery and confidence of borrowers and bankers. Loan balances fell by more than $56 billion, or 0.8%, in the quarter ended March 31, according to the Federal Deposit Insurance Corp. The quarter-over-quarter decline marks a reversal from three consecutive quarters in which lending expanded. While lending to larger commercial and industrial customers rose as it has for nearly two years, declines came in nearly all other types of loans, including those to small businesses...To be sure, banks kept lending more to larger companies. Commercial and industrial loans grew 2% from last year's fourth quarter. Auto lending rose 1.5% from the last quarter of 2011. But those increases were offset by contraction in other categories, led by a 5.6% decline in credit-card loan balances." Victoria McGrane in The Wall Street Journal.

4) The Senate rejected both parties' plans to freeze the student loan rate. "The Senate held two votes Thursday on measures to ensure that student loan rates for millions of college students do not double in July -- and at the conclusion of the legislative action, the issue remained exactly where it began: stuck. The measures, one offered by Democrats and the other by Republicans, each failed to reach the 60-vote threshold necessary to move forward...If they cannot resolve the dispute, loan rates will rise from 3.4 to 6.8 percent on July 1, increasing the cost of college for 7 million students...Democrats have proposed paying for the additional year of loan subsidies by ending a tax provision that allows executives of some small businesses to collect some of their income as business profits instead of wages, allowing them to avoid paying payroll taxes...The Republican proposal would have paid for the loan-rate freeze by eliminating the preventative health-care fund created in the 2010 health-care act." Rosalind Helderman in The Washington Post.

5) Congress is headed towards a vote on the Bush tax cuts before the elections. "It is a maxim in Congress these days: If high-profile legislation affecting millions of Americans is about to expire, deal with it at the last possible second, preferably with rancor. But a major exception is in the offing with the Bush-era tax cuts, which are set to lapse on Jan 1. Both parties in the House and the Senate are eager, perhaps even giddy, at the prospect of voting for their respective versions of an extension of the cuts this summer, well before the due date. Speaker John A. Boehner, Republican of Ohio, has said there will be a House vote to extend the entire package before the November election...Democrats are trying to up the ante. On Wednesday, Representative Nancy Pelosi of California, the Democratic leader, called on the speaker to schedule a vote right away...Without any extensions, the expiration would raise taxes next year by $221 billion." Jennifer Steinhauer in The New York Times.

Top op-eds

1) TETT: In banks' eyes the eurozone has already fractured. "The bankers...were alarmingly precise: amid all the speculation about Grexit, they told me, banks are increasingly reordering their European exposure along national lines, in terms of asset-liability matching (ALM), just in case the region splits apart. Thus, if a bank has loans to Spanish borrowers, say, it is trying to cover these with funding from Spain, rather than from Germany. Similarly, when it comes to hedging derivatives and foreign exchange deals, or measuring their risk, Italian counterparties are treated differently from Finnish counterparties, say. The halcyon days of banks looking on the eurozone as a single currency bloc are over; cross-border risk matters. To put it another way, while pundits engage in an abstract debate about a possible break-up, fracture has already arrived for many banks’ risk management departments, at least when it comes to ALM in their eurozone books. It is difficult to overstate the significance of this." Gillian Tett in The Financial Times.

2) KRUGMAN: The 'productivity surge' never happened. "Once upon a time, this fairy tale tells us, America was a land of lazy managers and slacker workers. Productivity languished, and American industry was fading away in the face of foreign competition. Then square-jawed, tough-minded buyout kings like Mitt Romney and the fictional Gordon Gekko came to the rescue, imposing financial and work discipline. Sure, some people didn’t like it, and, sure, they made a lot of money for themselves along the way. But the result was a great economic revival, whose benefits trickled down to everyone. You can see why Wall Street likes this story. But none of it -- except the bit about the Gekkos and the Romneys making lots of money -- is true. For the alleged productivity surge never actually happened. In fact, overall business productivity in America grew faster in the postwar generation, an era in which banks were tightly regulated and private equity barely existed, than it has since our political system decided that greed was good." Paul Krugman in The New York Times.

3) SAMUELSON: The presidential election is about confidence. "The Great Jobs Argument -- which will be with us until the election -- has an interesting and largely ignored subplot. It’s about confidence: Which candidate will instill more of it and how much does it matter for accelerating the sluggish economic recovery?...Each approach speaks to confidence: Romney to business confidence; Obama to consumer confidence. Romney’s assumption is that unless the business climate improves, the recovery will continue sputtering because companies will lag in expanding, hiring and investing in new plants and products. Obama’s hostility to business, in this view, hobbles the economy. Obama’s presumption is just the opposite: Anxieties for the future are driven, in part, by fears that American business does not have this nation’s interests in mind. Dispelling these doubts will help restore people’s faith in the future -- and their willingness to spend." Robert Samuelson in The Washington Post.

4) NORRIS: We have our higher education priorities wrong. "There are a lot of government subsidies, and in the current fiscal atmosphere many are shrinking by necessity. What appears to be lacking is any rational way of deciding which should shrink. The volume of federally guaranteed student loans to students at so-called proprietary colleges -- the ones that intend to operate at a profit and get nearly all their revenue from the government -- continues to grow. At the same time, state and local governments across the country are slashing spending on higher education, and community colleges -- the ones most likely to offer alternatives to the students recruited by the far more expensive proprietary schools -- are suffering some of the largest reductions...Whatever the case used to be for subsidizing these highly profitable companies, it ought to be a lot less compelling now when the country is slashing subsidies for other types of schools -- ones that generally do a better job for their students but that spend far less on lobbyists." Floyd Norris in The New York Times.

5) MCCONNELL: The legal challenge to Obamacare should be taken seriously. "Both sides in the ObamaCare litigation agree, in principle, that a line must be drawn somewhere, and that it must be drawn by the Supreme Court...The states challenging the individual mandate rely on a simple conceptual point: Under its power to regulate 'commerce,' Congress can regulate only transactions taking place in the economy; it has no power to regulate nonactivity--to regulate persons not engaged in commerce by requiring them to buy products or services they would not otherwise purchase, in this case health insurance. That may be a correct reading of the Constitution, or not, but it must be taken seriously...Either the drafters of the legislation should have stayed within the generous bounds of authority established by prior precedent, or the administration's lawyers needed to offer a legal defense for going beyond those precedents that does not do violence to fundamental structural features of our Constitution." Michael McConnell in The Wall Street Journal.

Top long reads

Dan Kaufman on how Wisconsin became the most politically divisive place in America: "What followed was a drawn-out fight that resembled other statewide battles over labor, education and voter-registration laws -- all of which have been introduced since the election of the Republican governor Scott Walker in 2010. The most bitter of these fights began in early February last year, when Walker proposed eliminating virtually all collective-bargaining rights for a vast majority of the state’s public-employee unions. Around the time that Walker announced the measure, similar laws were introduced in Michigan, Ohio and Florida, and a nationwide demonization of public employees caught fire. Within two months, the National Conference of State Legislators had tracked more than 100 bills, initiated across the country, attacking public-sector unions."

Soul interlude: Raphael Saadiq plays "Stone Rollin'" live at the Bing Lounge.

Got tips, additions, or comments? E-mail me.

Still to come: Jobs claims are down; a crackdown on food stamp fraud; flood insurance is extended; gas prices keep ticking down; and a piglet and a beagle star in a buddy comedy.


Jobs claims fell slightly. "New government data released Thursday suggest that the job market’s spring slump may be ending, although turmoil in Europe could stall the progress of the recovery. The number of people who filed new claims for unemployment insurance fell slightly last week to 370,000, according to the Labor Department. The average for the past four weeks has moderated after a spike in April that brought the country alarmingly close to 400,000 new claims a week, a benchmark that signals deeper troubles in the economy. The job market had been growing robustly over the winter but hit a wall this spring. Although some economists explained the drop-off as a mathematical quirk resulting from this year’s warmer weather, others worried that it was a more significant speed bump. Weekly jobless claims reached 392,000 in April before tapering off this month." Ylan Mui in The Washington Post.

@grossdm: 1st time unemployment claims nugget: compared with a year ago, 1.6 m fewer americans getting unemployment benefits

@JimPethokoukis: JPMorgan on jobless claims: "It looks like the labor market is continuing to heal, but that there has been some loss in momentum recently"

Republicans leaders want to temporarily cut tariffs on some items. "Republican leaders are pushing a bill to temporarily cut tariffs on hundreds of chemicals, components and other items used by manufacturers that can only be obtained from overseas sources. Some GOP lawmakers say the bill, pushed by lawmakers for home-state companies, directly violates the party's earmark ban...But 65 Republican freshmen, led by Rep. Tom Reed (R., N.Y.), support the measure. They said in a letter to Speaker John Boehner (R., Ohio) that they see tariff reductions as tax cuts, not earmarks...Democrats, enjoying the argument between Republicans, are reluctant to comment publicly, but they support the tariff bill. They said Republicans attacked Democrats over tariff bills when the GOP was in the minority. The White House estimates that customs duties and fees will raise $30.8 billion in 2012. Each of the tariff cuts being requested would total $500,000 a year or less. Congress has passed a tariff reduction bill every few years since 1982." Naftali Bendavid in The Wall Street Journal.

Calls for mortgage refinancing are gathering steam. "Mark Zandi, chief economist with Moody's Analytics, told a Senate panel Thursday that he supports a measure to eliminate hurdles for homeowners to refinance into lower interest rates under the Home Affordable Refinance Program (HARP), and suggested that lawmakers settle remaining differences and pass a bill soon...The Democratically sponsored legislation would help reach more homeowners, especially those who are underwater on the loans and are current on their payments, he said. The panel hasn't set a time yet to mark up the legislation, but there seems to be agreement among Republicans and Democrats to move the bill through the panel. Zandi's remarks echo those of Housing Secretary Shaun Donovan to pass the bill authored by Democratic Sens. Robert Menendez (N.J.) and Barbara Boxer (Calif.) to remove those barriers and expand refinancing opportunities." Vicki Needham in The Hill.

The USDA is a ruthless debt collector when mortgages go bad. "The U.S. Department of Agriculture's Rural Housing Service, which provides mortgage loans to rural homeowners and guarantees loans made by banks. It accounted for at least a third of all mortgages issued in 2010 in sparsely populated areas such as Morton County, Kan., and Sioux County, Neb., according to data reported under the Home Mortgage Disclosure Act. Unlike private firms, the USDA doesn't need permission from a court to start collecting on unpaid debts. It can in some cases seize government benefits and tax refunds before a foreclosure is completed. After foreclosure, the USDA can go after unpaid balances, even in states that limit such actions by private lenders...The Treasury Department collected $45 million in delinquent USDA mortgage debt from borrowers in the last fiscal year, up from $23 million in fiscal 2007. At the end of fiscal 2011, $779.2 million in delinquent USDA mortgage debt was awaiting collection, up from $420.7 million in 2007." Ruth Simon in The Wall Street Journal.

Fannie Mae's CEO search is down to two. "Fannie Mae has narrowed its search for a new chief executive to two finalists and could soon offer the position to Timothy Mayopoulos, the mortgage-finance company's general counsel and lead candidate...But the potential promotion could force Mr. Mayopoulos to take a big pay cut, raising new challenges for Fannie's board and its government regulator, the Federal Housing Finance Agency, which in March pledged to reduce pay for the next chief executive to around $500,000. As Fannie's general counsel, Mr. Mayopoulos stands to make up to $2.66 million in annual salary and deferred pay this year. If he becomes the CEO, the company would either have to dock his pay sharply or the regulator would have to go back on its pledge...If the top job doesn't go to Mr. Mayopoulos, the company is likely to turn to an outsider. S.A. Ibrahim, CEO of Radian Group Inc., a Philadelphia-based mortgage-insurance company, has emerged as the strongest outside candidate." Nick Timiraos and Joann Lublin in The Wall Street Journal.

Baseball interlude: Summer Anne Burton is drawing every member of the Baseball Hall of Fame.

Health Care

The USDA announced measures to reduce food stamp fraud. "The U.S. Department of Agriculture announced Thursday new proposals targeting individuals who sell SNAP cards, commonly known as food stamps, for cash. The agency said individuals suspected of defrauding the system are requesting a large number of replacement cards...The rules proposed Thursday will give states the option to place individuals under increased scrutiny when they have asked for an excessive number of replacement cards. Determination of when requests are excessive and require further investigation will be up to the states. States will be required to protect elderly individuals and people with disabilities who may repeatedly lose their cards but are not committing fraud, the proposal noted...The USDA said it plans to announce additional sanctions and penalties being developed for fraudulent retailers, along with increased efforts to ensure those who are booted from the system in one state don't regain access by applying for SNAP benefits in another state." Todd Sperry in CNN.

Domestic Policy

The farm bill was formally filed. "Setting the stage for floor debate next month, the Senate Agriculture Committee formally filed its new farm bill with the full chamber late Thursday, after making final adjustments in a supplemental crop insurance option to ensure a lower-cost score from the Congressional Budget Office. Midwest popcorn producers and a desert terminal lakes program-- important to Nevada and Senate Majority Leader Harry Reid--were also the subject of new language. But the much bigger issue--and dollars--centered on revisions to clarify that farmers who enroll in the new supplemental coverage will be subject to a 10 percent deductible...The current system of direct cash payments to farmers would be eliminated entirely and a variety of new crop insurance options substituted instead. The biggest single initiative is the so-called Agriculture Risk Coverage or ARC, a new government-financed program to protect against shallow losses. Cotton would get its own separate revenue insurance plan." David Rogers in Politico.

An extension of the flood insurance program passed the Senate. "The Senate on Thursday afternoon quickly approved a two-month extension of the National Flood Insurance Program (NFIP), an action that was made possible by an agreement Senate Majority Leader Harry Reid (D-Nev.) made to take up a longer-term extension when the Senate returns from the Memorial Day break. The Senate approved the extension by unanimous consent, after Reid declared that the Senate had no choice but to extend the program, which expires at the end of May...The House has already passed a 5-year extension of the NFIP, the federal program that offers the only flood insurance available to thousands of communities around the country that sit on flood plains. The House bill includes several reforms aimed at helping the NFIP work down the nearly $18 billion in debt it has racked up, including by increasing insurance premiums." Pete Kasperowicz in The Hill.

More teachers are using the summer for a second job or training. "For many teachers, the vaunted 'summer off' is a shrinking season. Although all the teachers interviewed at Patriot had some kind of getaway planned, they were booking around work-related obligations, such as workshops and second jobs, that fill in whole blocks in their planners...The economic downturn and frozen salaries have put financial pressures on thousands of teachers across the country. In Prince William, where teachers earned an average of $59,367 in 2011, pay has barely budged in three years. That leaves the season as a time to teach summer school for extra pay or to find a job outside of school. Many teachers, aware that adding degrees to their résumé is one of the few ways they can boost their pay, fill the break with graduate courses. And all educators have more to do each summer. They plan lessons, update materials and attend staff workshops." Steve Hendrix in The Washington Post.

@mattyglesias: Someone sent me a letter certified mail yesterday, USPS is saved!

Interspecies friendship interlude: A piglet and a beagle wrassle.


Obama nominated a new NRC chairman. "President Obama on Thursday nominated Allison M. Macfarlane, a professor of environmental science and policy at George Mason University, to be the next chairman of the Nuclear Regulatory Commission. Macfarlane, a geologist by training, served as a member of the White House Blue Ribbon Commission on America’s Nuclear Future, which examined nuclear waste disposal. Her nomination comes just three days after the current NRC chairman, Gregory B. Jaczko, announced his resignation amid complaints that he spoke harshly to women at the agency, allegations Jaczko denied. Jaczko, an advocate for nuclear safety, was frequently at odds with the four other commissioners. Lawmakers quickly issued statements endorsing Obama’s choice. Groups as varied as the Union of Concerned Scientists and the industry-backed Nuclear Energy Institute also praised Macfarlane and urged her confirmation." Steven Mufson in The Washington Post.

@Ben_Geman: Sen. Bernie Sanders, a nuke energy critic, on Allison Macfarlane, who Obama tapped to chair NRC: "I have no idea who she is."

Gas prices are continuing to drop. "As the Memorial Day weekend and the summer driving season approach, gasoline prices are easing. But most drivers will find prices only modestly lower than a year ago. Nationwide, the price of a gallon of regular gasoline has been drifting lower by about half a cent a day over the last month, and energy analysts say that trend should continue over the next few weeks, in at least some states...Gasoline prices are dropping primarily because of a decline in global crude oil prices, stemming from an easing of tensions in the Middle East and growing oil supplies, bolstered in recent months by the rapid return of Libyan oil exports and increased production from Saudi Arabia. Because oil is priced in dollars, the firming value of the dollar in recent weeks in the wake of the European financial crisis has also helped reduce prices. The sluggish global economy has also reduced demand for oil and other commodities, particularly in Europe." Clifford Krauss in The New York Times.

@grossdm: 4 years ago this week, oil was $127 per barrel. Today, about $90.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.