European leaders will meet later this week to decide the fate of the Euro, and by extension, the fate of virtually every economy in the advanced industrial world. I’m betting they’ll muddle through with some half measure meant to reassure investors, which will do nothing of the sort, and will wind up keeping millions of job-hungry Americans sitting on the sidelines.
If so, it will only be the latest in a long line of nerve-rattling shocks that have rattled investors and rocked the U.S. economy in the year since the lame duck Congress and the White House agreed to payroll and business tax breaks that were supposed to kick it into high gear.
- In March, the Japanese earthquake and tsunami disrupted the automobile supply chain, forcing temporary layoffs and short-circuiting sales.
- In May, gasoline prices spiked to nearly $4 a gallon, up a buck from just six months earlier. It drained consumer pocketbooks of badly needed dollars that had just been put there by the 2 percent payroll tax cut.
- In July, Congress and the White House subjected the nation and the world to the specter of default on the U.S. debt driven by political gridlock. Markets and consumer confidence tanked.
- The following month, the European sovereign debt crisis that began in Greece took center stage as rising interest rates across the Euro zone’s southern tier staggered the U.S.’s biggest trading partner.
Meanwhile, there was a consensus in Washington and most European capitals that deficit reduction was more important than fiscal stimulus and job creation. In the U.S., budget relief to the states was put on hold, which led to a half million public sector workers losing their jobs. As laid off teachers, policemen, firemen, sanitation workers and highway repairers joined the ranks of the long-term unemployed, they added a half point to the unemployment rate, which fell last week to 8.6 percent only because over 300,000 workers dropped out of the workforce.
Yet through it all, economic activity continued to grow, albeit slowly. Private employers added 1.5 million new jobs in the first ten months of this year. And the latest data suggests American consumers are itching to get back to consumption patterns that over the last several business cycles have always foreshadowed a 3 percent or higher growth rate and job creation. “Things are looking up,” said Gus Faucher, an economist at Moody’s Analytics. “The fundamentals are decent. Consumers aren’t spending like crazy, but they’re spending again.”
Consumers spent a record $52 billion over the Thanksgiving holiday weekend. Manufacturing activity continues to advance, according to a closely watched Chicago-area survey, and despite lower prices (or because of it) home sales in October rose by 10 percent, the highest level of the year.
All that preceded the announcement by central banks around the world last week to backstop European banks requiring U.S. dollars to meet any liquidity needs that might arise from the European debt crisis. The U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada lowered their rates for borrowing dollars from each other by a 0.5 percentage point to “ease strains in financial markets,” the Fed said in a release.
They also pledged to keep those rates in place for at least 14 months. “At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,” the Fed announcement said. China also took steps to stimulate domestic demand by lowering its central bank interest rate after a series of increases earlier this year.
Economists were quick to point out that the crisis in Europe is far from over. “It’s a temporary fix, not a cure,” said Asha Bangalore, an economist at the Northern Trust Bank in Chicago. “They’ve been thrown a temporary lifeline to provide liquidity. The question is still how the sovereign debt crisis will be resolved.”
That could be determined at the December 9th summit in Brussels that will bring together the leaders of the 27 nations in the European Union, including the 17 that make up the euro zone. An agreement to coordinate fiscal policies could lift the biggest cloud on the economic horizon. Investors around the world are clearly betting something positive is going to happen since most markets rose 4 percent or more in the wake of the announcement.
But skeptics abound. “This rally has no legs,” Bangalore said. “They need a TARP (Toxic Asset Relief Program) like policy action on sovereign debt and all the banks have to be recapitalized. The response after December 9th will be more meaningful.”
There is still work to do in the U.S., too. President Obama has been stumping for extension of the payroll tax cut, which expires on Jan. 1. Republican leaders in both the Senate and House have indicated they are inclined to go along. Their squabbling has now turned to how to pay for it. Republicans are pushing a continued freeze on federal workers’ pay, while Democrats prefer a 3.25 percent surtax on annual income exceeding $1 million. The later makes a lot more sense, since it won’t curb consumption for the well-off. The former strategy would simply rob federal Peters to pay the rest of us Pauls with no net gain in consumption — thus frustrating the goal of the tax break.
Portions of this story appeared first in The Fiscal Times.Did you like this? If so, please bookmark it, RSS feed.