* Obama working to nudge EU leaders into bold action
* Frustration mounts in Washington, fear too little too late
* Sets stage for tense G20 after Greek elections next week
By Stella Dawson
WASHINGTON, June 10 Rarely have economists spent
so much time poring over speeches and scrutinizing body language
for hints on the direction of world markets and the economy, but
these days politics trumps economics in setting the course of
Details of Spain's request for European Union aid to
recapitalize its banks and the results of fresh Greek elections
next Sunday are foremost on the week's agenda.
But there is a bigger issue at stake: the resolve of
European leaders to act with sufficient boldness to convince
financial markets they will fix the flaws in the monetary union.
Washington says this requires laying out a clear roadmap for
deeper financial and fiscal integration for Europe, and there is
a palpable sense that time is running out.
"With the stakes rising every day, we stand at a
crossroads," International Monetary Fund chief Christine Lagarde
said in a speech on Friday calling for urgent action.
Many policymakers are growing increasingly concerned that
Germany is not ready to lead Europe toward a deeper union, which
would require a greater pooling of financial risk, sharing of
debt costs and with it some loss of sovereign powers.
German Chancellor Angela Merkel showed a readiness to move
forward last week, saying: "We need more Europe. We don't only
need monetary union, we also need a so-called fiscal union. And
most of all we need a political union."
But U.S. President Barack Obama, whose re-election in
November could hinge on whether Europe rescues itself or its
woes tip the world economy back into recession, is taking no
chances. He used the bully pulpit of a news conference on Friday
to apply fresh pressure to European leaders.
"The sooner they act, and the more decisive and concrete
their actions, the sooner markets will regain confidence," Obama
Already the economic damage is being felt. The United States
reported last week that exports, an engine of its recovery, fell
in April for the first time in five months, and investment banks
are starting to mark down their global and U.S. growth
"It's political uncertainty. The worst-case scenario in
Europe does not have to materialize, just the fear of it is
enough to hurt growth," said Michael Gapen, economist and market
strategist at Barclays Capital.
His firm warned that risks to global growth are mounting, so
too did Morgan Stanley and UniCredit. Barclays lowered its U.S.
GDP forecast for the third and fourth quarters of this year from
3 percent to 2 percent and 2.5 percent, respectively, at a
quarter-over-quarter annualized rate.
"Businesses are stalling their investments and the loss of
stock market wealth is moderating the positive influence on
consumers," Gapen said.
China cut interest rates last week in a surprise move to
counter a slowdown, which is greatly influenced by weak demand
from Europe, its biggest trade partner.
Beijing is due to release fresh data early this week on May
exports and industrial output, which economists say should show
some improvement after a holiday-induced slowing and tighter
financial conditions in prior months.
The Reuters forecast is for China's output to expand by 9.9
percent year on year from 9.3 percent in April and for exports
to pick up to 6.8 percent in May from 4.9 percent. Urban
investment and loan growth figures, however, could slow,
reflecting prior attempts to rein in speculation. Still,
economists remain confident China will take all steps needed to
deliver 8 percent GDP growth this year.
But so much depends on Europe.
The Obama administration is working overtime before a G20
summit of the world's leading economies in Los Cabos, Mexico,
next week to cajole EU leaders to stop a vicious cycle of half
steps and fresh market turmoil.
Pessimism is spreading in Washington that they will deliver.
"Frustration arises from two factors. The speed has not been
fast enough from Europe and the scope of the solutions has not
gone far enough," said Domenico Lombardi, a former International
Monetary Fund official and now a senior fellow at the Brookings
"They are trying to put a Band-Aid on top of a gaping wound
at the moment, but there has not been an approach to tackle the
root cause," he said.
Spain's decision on Saturday to seek 100 billion euros ($125
billion) in EU aid to recapitalize its banks, more than twice
the minimum recommended by the IMF, will quell immediate
But heading into Greek elections next Sunday, where the
leftist anti-bailout party SYRIZA was leading in the final poll
allowed on June 1, Morgan Stanley's global head of economics
Joachim Fels said that all Spain's action might buy is some calm
before the storm.
Spain's recapitalization "hardly counts as a circuit breaker
as it raises the Spanish government's contingent liabilities,"
he told clients.
In other words, lending money to a sovereign government to
fix its banks when the country already is deeply in debt only
makes its debt profile worse. So if a new bout of market
volatility hits, especially if fears of Greece leaving the euro
zone are reignited after the election, financing problems for
Spain could worsen as well as, possibly, for Italy and even
Then major central banks, led by the Federal Reserve and the
European Central Bank, which both signalled last week they were
keeping their powder dry, likely would jump into the breach.
"It's all about policy, twenty-four by seven," said Vincent
Reinhart, Morgan Stanley's U.S. economist.