Aug. 5 (Bloomberg) -- Bloomberg View Executive Editor Jamie Rubin discusses the European sovereign debt crisis and its impact on markets. Rubin says European leaders must demonstrate they're "willing and able to fix the flaws" in the euro region. (Jamie Rubin is executive editor of Bloomberg View. The opinions expressed are his own. Source: Bloomberg)
Global markets have issued a vote of
no confidence in the management of the world’s two largest
economies, the U.S. and the euro area. To regain credibility,
leaders on both sides of the Atlantic need to recognize the
magnitude of the crisis they face.
The outlook reflected by the market rout is not
encouraging, coming as it does after European and U.S. officials
thought they were doing enough to fix their similar -- and
overlapping -- fiscal problems. The U.S. is growing at a rate
too slow to withstand a serious shock, and that shock could
easily come from Europe’s resurgent financial crisis. So far,
politicians’ efforts have been far too timid to convince the
world that they have the situation under control.
This week’s deal to raise the U.S. debt ceiling is a case
in point. Given the exceedingly weak recovery, the U.S.
government should stand ready to provide more stimulus. To
prevent larger deficits from harming its credit standing, the
U.S. must also convince investors that it is capable of putting
its long-term finances on a sustainable path.
Instead, partisan brinkmanship has undermined confidence.
The deal that Congress and the White House ultimately struck
doesn’t come close to solving the government’s long-term
problems, but threatens spending cuts that could weigh heavily
on economic growth in the short term.
Lacking Urgency
Europe’s leaders have also lacked urgency. Markets need to
see that German Chancellor Angela Merkel, French President
Nicolas Sarkozy and other officials can rise above national
politics to fix the euro area’s glaring flaws, which include the
lack of a unified fiscal authority. Instead, a series of half-
measures has mainly served to exacerbate the crisis, allowing
its spread to the large economies of Spain and Italy and to
banks that hold Europe’s sovereign debt.
Thursday’s moves in the markets gave a taste of how costly
politicians’ dithering can be. The drop in world stock markets
represents hundreds of billions of dollars in lost value.
Italy’s cost of borrowing, as measured by the yield on its 10-
year government bond, rose to a new euro-era high of 6.18
percent.
What needs to be done? Europe’s leaders should demonstrate
that they stand together, ready to do what it takes to restore
confidence. This would involve issuing jointly backed euro bonds
to replace most or all of the debts of struggling governments,
and simultaneously recapitalizing banks that would suffer losses
from debt restructurings. It also would include setting up a
finance ministry with enough taxation power to service the euro
bonds and provide stimulus to weaker economies.
Consumer Demand
In the U.S., the government must be prepared to boost
consumer demand, and that means putting people back to work.
Ideally, a comprehensive plan to fix the country’s long-term
finances could be combined with a shorter-term stimulus.
President Barack Obama is already promising to pivot from debt
talks to a national jobs program. But having just completed
punishing negotiations over spending cuts, he has very little
hope of finding new money -- and little time to waste.
Barring a major new stimulus program, some steps can be
taken. Obama could ask Congress to quickly adopt a jobs tax
credit, renew clean energy tax breaks and temporarily waive
federal environmental, labor and other requirements that delay
public works programs, all moves that would put workers back on
private payrolls.
Job Sharing
The president could ask Congress to allow states to channel
some of their federal unemployment compensation into job-sharing
programs, which have worked well in Germany and a few American
states. He could encourage Fannie Mae and Freddie Mac to allow
homeowners who are current on their mortgages, but who owe more
than their houses are worth, to refinance into lower-rate loans,
thus freeing up more cash to spend.
When the Federal Reserve meets on Aug. 9, it should signal
that it’s ready to do its part, too. Among the stimulative tools
at its disposal: Pledging to hold onto the U.S. Treasury bonds
it has accumulated in its quantitative-easing programs, and to
reinvest the proceeds from any maturing securities in government
debt. It could announce that it plans to keep its key interest
rate near zero for a longer, more defined period. It could lower
the 0.25 percent interest rate it pays banks that park excess
reserves at the central bank, to prompt more lending and
investing. And it could replace the shorter-term securities it
holds on its $2.9 trillion balance sheet with longer-term ones,
to push down those rates as well.
Ultimately, markets may force politicians and policy makers
to implement all these measures and more. The world will be much
better off if they find the will to get ahead of the curve.