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Analysis: Memories of 2008 drive U.S. pressure on Europe crisis

Sep 25, 2011, 1:44 p.m.
A shadow is cast on a board showing stock market prices inside a brokerage in Taipei September 6, 2011. REUTERS/Pichi Chuang

By David Lawder

WASHINGTON (Reuters) - Behind the persistent U.S. pressure on Europe to strengthen its bailout defenses is an ominous prospect: another systemic crisis that would almost certainly throw the United States back into recession.

A deepening of Europe's sovereign debt crisis triggered by a Greek default or inaction by euro zone policymakers could launch a replay of the market seizures in 2008 that followed the collapse of Lehman Brothers, analysts and bankers say.

The scenario would largely follow the same script -- markets collapse, investors flee risk, bank funding dries up and companies, who have already dramatically slowed hiring, shed employees to gird for the worst.

It's a grim picture for President Barack Obama, who faces re-election next year.

Obama pressed German Chancellor Angela Merkel and French President Nicholas Sarkozy in talks last week to act with more force to contain the crisis, and Treasury Secretary Timothy Geithner pressed the case with finance ministers at meetings over the weekend.

"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," Geithner said.

With the U.S. economy already growing too slowly to lower an unemployment stuck above 9 percent, it is in too poor of shape to weather a big shock from Europe.

"If there's a huge blow up in Europe, it would pose a very large financial risk and that in turn would feed back on the real economy both in Europe and the United States," said Edwin Truman, who served as an adviser to Geithner during the depths of the financial crisis in early 2009.

Europe's woes could provide some impetus to U.S. lawmakers considering a proposal from Obama for a $447 billion package of tax cuts and spending designed to spur job creation.

Former White House advisers Austan Goolsbee and Lawrence Summers both cited Europe's woes as a reason to pass the plan.

"There has, if anything, been too much collective belt tightening. Our challenge is ensuring that growth proceeds at a satisfactory rate in the years ahead," Summers said on Friday, calling further fiscal tightening "moronic."

"In the United States it is clear we have lost half a decade to this downturn and it appears we may lose another half decade or more," he added.

U.S. BANKS INSULATED?

Geithner has now spent three straight weekends urging European officials to provide a definitive solution to the crisis by erecting a safety net with similar powers to the array of programs the U.S. Treasury and Federal Reserve tapped to fight the financial crisis.

During meetings of the Group of 20 major economies and the International Monetary Fund this weekend, Geithner said euro zone governments should team up with the European Central Bank to leverage their resources and extend their market clout.

He also repeatedly called the euro area crisis the biggest threat to the global economy.

This is playing out most immediately in falling U.S. stock prices, where the Dow Jones industrial average suffered its worst week since October 2008, falling 6.4 percent on fears of a Greek debt default and the Federal Reserve's gloomy outlook for U.S. growth. Destruction of asset wealth feeds directly into reduced demand.

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