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A New Center of Economic Gravity

Twice now in the last two years, eurozone troubles have derailed recovery. What it means.


The Euro logo stands in front of the European Central Bank in Frankfurt, Germany.(FRANK RUMPENHORST/AFP/Getty Images)

Barack Obama is trying hard to orchestrate an economic recovery from Washington. With the debt-ceiling fight over, the president sought to keep his long-suffering Treasury secretary, Tim Geithner, in office. Then on Friday—after taking an evening to celebrate his 50th birthday in the Rose Garden with Stevie Wonder and Herbie Hancock—Obama announced new jobs measures, this time affecting veterans.

Obama’s plan for a “reverse boot camp” and “returning heroes tax credit” to train vets and induce companies to hire them seem like worthy ideas. But are people—namely, global investors—really paying attention? Twice now in the last two years of this troubled recovery, the biggest economic news has come from across the Atlantic. Today, it is problems in the eurozone—an economic area larger than the U.S. economy and, apparently, even more confused politically—that seem to be derailing recovery once again, just as happened a year ago.


Earlier this week, a panicky sense that the eurozone’s debt crisis was spreading from its smaller nations on the periphery such as Greece to the larger economies of Italy and Spain—which may be beyond the new European Financial Stability Facility’s capacity to rescue—precipitated a steep market tumble and fears of double-dip recession. Especially troubling were mixed signals from top European officials indicating that a hoped-for move toward fiscal federalism would not happen so quickly after all. In the spring of 2010, the first rumblings of the Greek crisis were blamed, in part, for slowing what seemed at the time to be a promising U.S. recovery.

“Moving our economy forward … is the responsibility of all Americans,” Obama said Friday in his latest bid for bipartisan response to unemployment. But more and more, as even the president acknowledged, the responsibility for the laggard recovery seems to be coming from abroad—whether, as Obama said, it was the “Arab Spring’s effect on oil and gas prices, or the impact of the Japanese tsunami on “supply chains,” or most of all, the effect that the troubled monstrosity in the center of Europe is having on global growth and stability.

“It’s not surprising, in a sense,” says Phil Suttle, chief economist at the Institute for International Finance, a banking lobby. “The eurozone combined is the world’s biggest economy.”


Indeed, much of the market news on Friday also seemed to be mainly moved by reports that Italy’s debt problem might be addressed through the combined efforts of the European Central Bank and the government of Prime Minister Silvio Berlusconi.

Ever since the advent of the euro in 1999, U.S. officials have always felt a bit helpless about European Monetary Union. “We know it’s important, but what is it we’re supposed to do about it?” a senior Clinton administration official said to me back then. At the beginning the eurozone was supposed to be a kind of European End of History, a new high water mark of post-historial policlal stability, and a new model for economic integration. "EMU," declared Jurgen Stark, then a top German Finance Ministry official, "will have no parallel in history."

That was true. But instead the eurozone has developed unparalleled problems. At its heart is an unresolved dilemma: politically, the Europeans can’t permit the eurozone to fail, and yet, according to the rules of economics, the eurozone probably should fail. Its weaker and more indebted economies have no monetary means to work their way—because they no longer have their own currencies to devalue—and yet the fiscal integration that would require separate governments to behave according to a single discipline doesn’t exist either.

Despite the impressive rescue efforts of recent months, no mechanism for pan-European fiscal policy exists. Nor is there any enforcing mechanism to stop governments from running up big budget deficits and national debt, even though the rules of the 1992 Maastricht Treaty and the Stability and Growth Pact of 1997 say they shouldn’t. (There was an EMU entry requirement, but we’ve since learned that Greece and Italy probably lied their way in by disguising their debt, helped by Wall Street derivatives deals.)


The eurozone’s issues have only added in a big way to a sense in Washington that America’s economic problems are largely beyond their ability to fix. The debt-ceiling standoff may be over for the moment, but the demonstrated power of the tea party to shape the budget discussion has only ensured that Obama will have no big-gauged tools like another giant fiscal stimulus. Nor does Fed Chairman Ben Bernanke have many more options, despite the expectation of “QE3”—or another round of U.S. Treasury purchases known as “quantitative easing.”

With growth slow and jobs meager—despite a slight downtick in the unemployment rate to 9.1 percent on Friday—the U.S. economy seems to be increasingly vulnerable to policy decisions beyond our shores.

Twice in the previous century, Europe sucked the rest of the world into its political problems in the most dramatic way. The result was two world wars. Now the danger is a different. But Europe seems to be turning into the center of gravity once again.

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