Europe Next Stop For Geithner
Treasury Secretary Timothy Geithner may have thought the hard work was in Bejing this week, but his visit to Europe could be even more difficult. Geithner will meet with the new Finance Minister in England before meeting with European Central Bank President Jean-Claude Trichet. Geithner's final stop will be a meeting with German Finance Minister Wolfgang Schaubel.
In public, the meetings may be gracious but behind close doors, Geithner will be met with skepticism and even stern criticism as Europe and the U.S. appear to have diametrically opposed views about how to cope with the global financial crisis.
Geithner is expected to encourage that Europe apply stress tests to the region's banks and that the European Union members pull together at this critical time. Europe's lack of a unified approach to resolving the region's debt crisis is threatening the euro and the very existence of the European Union.
In his meeting with the UK's Chancellor of the Exchequer George Osborne, Geithner will stress that the U.S. stimulus package is responsible for the creation of 3.4 million jobs and has helped to generate a 4.6 percent first quarter increase in GDP.
To Spend or To Cut?
The UK and the European Union have taken a different approach to the debt crisis. In Europe, the emphasis has been on austerity cuts to trim deficits, whereas the US. has shown a willingness to spend it sway out of the recession. Geithner's hosts may well raise concerns about the $1.65 trillion budget deficit the U.S. has undertaken.
The Obama Administration's "spend now and pay later" approach is unpopular in Europe. In the U.S. the budget deficit remedy is focused on growth. In Europe, the remedy for the region's debt is seen as a series of national budget cuts that bring deficits in line with the EU's standards and keep inflation under control.
However, the region's banks are under pressure and the debt crisis is now viewed as a regional banking crisis. To restore confidence, Geithner will push for stress testing similar to what the U.S. banks underwent in 2008-2009.
A weak euro boosts the region's export capabilities and hurts the U.S. Although the EU is not entirely unified on how best to deal with the debt, they are unified in recognizing that the weak euro is to their immediate advantage. In particular, France and Germany are at odds. Most of the EU's members oppose Germany's unilateral ban on naked short sales; a ban that may well expand in the very near future.
On Wednesday, German bonds lacked support while Portugal's bond sale was a rousing success. The ECB announced that it has settled 26.5 billion euro bond buys through the end of last week. In efforts to ease the transmission of intra-bank lending, the ECB has also extended an undisclosed amount of extra liquidity to the region's banks. The zone's critical intra-bank short-term lending has been stressed for more than a month. The ECB has downplayed the risk of inflation, relying heavily on the austerity cuts to neutralize inflationary practices.
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