While pressures on European governments and banks have eased over the past few month, in a testimony to be delivered today before Congress, Treasury Secretary Timothy Geithner expresses serious fears that Europe is still very much in trouble.His concerns run contrary to investor sentiment recently, but in line with Wall Street economists and the likes of Fed Chairman Ben Bernanke, who continue to remain cautious about the impact of renewed European economic turmoil.
In particular, he notes that European economies are still plagued by the same problems that got them into this mess: lack of true fiscal and monetary integration and growth.
“Fiscal reforms are only part of the solution. The harder challenge is to address the erosion in competitiveness and restore reasonable rates of economic growth, a challenge made more difficult by the fact that in a monetary union, the member states do not have their own monetary policies or currencies exchanges rates cannot adjust, and in Europe today there is no mechanism for fiscal transfers to help cushion economic shocks.“
That said, Geithner’s expectations aren’t very high for the near term:
“Economic growth is likely to be weak for some time…The Euro Area accounts for about 18 per cent of global GDP. It is a major source of financing for many emerging economies. It accounts for about 15 per cent of U.S. exports of goods and services, but a larger portion of exports of many or our trading partners. When growth slows in Europe, it affects growth around the world. And when the fears of a broader European crisis have been most acute, as they were in the summer and fall of 2011 and during the spring and summer of 2010, financial markets fell around the world, damaging confidence and slowing the momentum of the global recovery.
Our financial system has relatively little exposure to the five European economies at the heart of the crisis, but we have significant financial and economic ties to Germany and France and the continent as a whole.“