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Obama Tries to Inoculate the U.S. Against Contagion from Euroland

But will his efforts be successful?

12:00 AM, May 22, 2010 • By IRWIN M. STELZER
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President Obama is a busy man. What with having to persuade the United Nations Security Council to pass the latest and toothless sanctions on Iran, excoriating oil companies for the Gulf Oil spill, pushing a financial reform bill through congress, and attacking the state of Arizona for enacting a law to stem the tide of illegal immigrants, something his administration refuses to do, you would think he has no time to take on the troubles of euroland.

Obama Tries to Inoculate the U.S. Against Contagion from Euroland

But he found time to call Spain’s president, José Luis Rodriguez Zapatero, to urge him to get his financial house in order. There is no indication that Zapatero told the president to do the same -- one doesn’t bite the hand of someone about to feed him. Spain’s president and his EU colleagues needed at least two favors from the American president, and they need them now. The first was for Obama to resist congressional demands that he prevent the International Monetary Fund from contributing U.S. dollars to the EU bailout of Greece and other members of Club Med: a measure moving in that direction passed the Senate on a 94-0 vote. Obama has obliged -- so far.

The second favor was to get the American president to go along with the Federal Reserve Board’s decision to make dollars available to the European Central Bank for use by European banks. He did.  The eurozone has more request to make, but not just yet: that the U.S. intervene in currency markets to stabilize the euro.

Obama acquiesced because he fears the trouble on euroland’s periphery will nip America’s recovery in the bud, or in the now-common usage, that the contagion will spread across the Atlantic. Indeed, investors here are already showing signs of contracting the disease, to which no American firm or bank is thought to be immune. Roberto Pedone, of, points out that even mighty Apple has a 27.5 percent exposure to the eurozone.  As far fetched as it might seem to think that a few tiny eurozone countries can bring down the mighty American economy, Obama has reason to worry.

Start with his biggest political problem -- the so called jobless recovery. Despite what is clearly a faster, better than expected recovery, the jobless rate remains too high to create a feel-good factor among most voters, especially the lower-income groups on which Democratic politicians depend. Note that while other retailers are seeing their customers return, Wal-Mart has recorded its fourth consecutive quarter of declining sales, which says something about the plight and gloomy outlook of a good part of the Democratic base.

Obama has been banking on a doubling of U.S. exports in five years to create millions of jobs. Forget whether that goal is realistic. If it was before the euro-crisis, it no longer is. The decline in the euro from around $1.50 to below $1.25 has made European goods more competitive in America, and made-in-the-U.S.A. goods and services dearer in euroland. Worse still, since the Chinese peg the yuan to the dollar, the euro’s fall and the yuan’s associated rise have also made Chinese goods less competitive in the 16-nation euro bloc. This is no small matter to the Chinese regime, desperate to create enough jobs to avoid social unrest: the eurozone absorbs 14.6 percent of China’s exports, making it second in importance only to America’s 20 percent. 

That has had two effects that Obama would like to see reversed. The first is that it has made the Chinese less inclined than ever to do what America has long sought: allow the yuan to rise by loosening its peg to the dollar. The second is that it diverts Chinese exports from Europe, where Chinese products are now more costly, to the U.S., where the yuan-to-dollar peg prevents any loss of Chinese competitiveness. Obama’s trade union supporters are not pleased. As if the situation were not already bad enough, most experts are predicting that the euro will hit $1.10 before stabilizing. That might make Americans dust off their travel brochures, but it won’t do much for job creation in the U.S.

The president has other reasons to worry about contagion. The problem in Greece has focused attention on all sovereign balance sheets, at a time when the rating agencies are under pressure to be more stingy with their triple-A ratings. Given the Grecian-level of the U.S. fiscal deficit, it is no surprise that the raters have warned America that it no longer can take its high rating for granted, and must rein in spending, which the Republicans are calling for, and/or raise taxes, which the Democrats are demanding. Result: stalemate, and a debt-to-GDP ratio heading towards somewhere between 90 and 100 percent in the absence of major policy changes.

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