SHAHEEN EXAMINES IMPLICATIONS OF EUROPEAN DEBT CRISIS FOR UNITED STATES

Questions experts on path forward for Eurozone agreement in wake of Greeceā€™s call for popular referendum

November 02, 2011

(Washington, D.C.) – U.S. Senator Jeanne Shaheen (D-NH), chair of the Senate Foreign Relations Committee’s Subcommittee on European Affairs, today held a hearing to analyze the potential impact of the ongoing European debt crisis on the global economy and U.S. strategic interests.  Shaheen asked the hearing’s panel of financial and economic experts about these issues, and how they believed Greece’s surprise decision to hold a referendum on the Eurozone deal announced last week would affect the outcome of that agreement.    

“The United States and the transatlantic community have fought two devastating world wars and spent countless resources over nearly six decades to help bring about a Europe that is ‘whole, free, and at peace,’” Shaheen said.  “Today, Europe faces a much more complex challenge where the forces of instability are not war and fighting, but financial uncertainty and the specter of a continent-wide economic breakdown.  The bottom line is America needs a strong and active European partner, and we need our European allies to do what is necessary to put the financial crisis behind them.”

The witnesses testified that the European crisis is grave and holds the potential for complex consequences for the United States.

“Europe is America’s largest trade and investment partner, and extensive cross-ownership of large financial institutions exists,” said Jacob Kirkegaard, a Research Fellow at the Peter G. Peterson Institute for International Economics.  “It is consequently inescapable that the U.S. domestic economy will experience a further negative external shock from any rapid deterioration of the European debt crisis.”

“The European crisis is no longer simply an economic problem, it is increasingly a foreign and security policy challenge for the United States,” said Bruce Stokes, Senior Transatlantic Fellow for Economics at the German Marshall Fund of the U.S.  “This crisis has the potential to undermine the transatlantic alliance, something the Soviets never accomplished during the Cold War.”

“The seriousness of the present Eurozone debt crisis is that it has the potential for causing a full-blown banking crisis in Europe’s core countries,” said Desmond Lachman, a Resident Fellow at the American Enterprise Institute.   “A deepening of the European crisis could very well derail the U.S. economic recovery.”

“By far the most likely scenario, which the latest agreement only reinforces, is a continuation of the ‘muddle through’ approach that has characterized the European response since the advent of the crisis,” said David Gordon, Head of Research and Director of Global Macro Analysis at the Eurasia Group.  “In other words, Europe is unlikely to make significant structural moves toward a more integrated fiscal union, will suffer several more years of poor economic performance, and will exhibit an increasingly inward-looking orientation in global affairs.”

Below is Shaheen’s opening statement, as submitted for the record.

OPENING STATEMENT

CHAIRWOMAN JEANNE SHAHEEN

“The European Debt Crisis: Strategic Implications for the Transatlantic Alliance”

 November 2, 2011

The Senate Foreign Relations Subcommittee on European Affairs meets today to discuss an issue critical to the global economy and to long term U.S. strategic interests. The ongoing European debt crisis presents one of the most complex challenges to European stability since the creation of the European Union.  This is a particularly timely hearing today given yesterday’s surprise call in Greece for a popular referendum on the recent Eurozone agreement, as well as the G-20 meeting in France, scheduled to begin tomorrow. 

My hope is that we will get a chance today to review some of what led us to this crisis, evaluate the Eurozone deal announced last week, and consider where Europe goes from here.  But more importantly, I also wish to discuss some of the broader strategic implications and why a resolution in Europe means so much for the United States.  We have a very impressive panel of expert witnesses, and we look forward to engaging with them on these issues.

In today’s global economy, Europe is by far America’s most important ally.  Europe is the United States’ largest trading partner and export market, and together, the U.S. and Europe account for over half of world GDP, one-third of world trade and three-quarters of global financial services. 

All of which means jobs and economic growth here in the United States and in Europe.  But it also means that what happens in Europe can have significant repercussions for the American economy, and as we have seen over the last year, financial instability and uncertainty in Europe can easily spill across the Atlantic.  Our markets know this, our businesses know this, and we ignore this reality at our own peril.

As we entered last week’s historic Eurozone summit, European leaders faced a number of difficult realities. Europe had to deal first and foremost with an insolvent Greek government by significantly restructuring its debt.  Leaders also needed to recapitalize European banks so they could withstand a Greek debt write-down.  Finally, they needed to create a credible firewall around much larger Eurozone countries facing pressures from contagion effects.

After a long series of negotiations, urgency finally gave way to a tentative late-night agreement among Eurozone economies on some of these critical issues.  Leaders announced a voluntary 50 percent cut on Greek bonds, a requirement to raise $148 billion in new capital for European banks and a significant increase of the Eurozone bailout fund.  Despite the announcement, many of the details of the agreement remain murky and significant questions remain, including the fate of credit default swap purchases and the composition of the bailout fund increase. 

This agreement was no doubt an important step, but it is just a first step. Significant challenges still lie ahead, and it is critical that the implementation of this agreement moves forward with the urgency it deserves. 

One of those challenges is the surprise Greek announcement this week that the government would seek popular approval of the bailout package – a decision which roiled markets yesterday and adds new urgency to the G20 meetings this week in France.  At the very least, a referendum would likely set back implementation of the Eurozone plans at a time when urgency is needed.  At the very worst, as the Chairman of the Eurozone finance ministers suggested yesterday, Greece could go bankrupt if voters rejected the bailout package.    

As German Chancellor Angela Merkel said last week, “The world [was] watching Germany and Europe” – watching to see if Europe was able to take on the tough decisions required to address this crisis.  The world is still watching.  I encourage our partners in Europe to continue to act with the urgency the situation requires. 

As important as the economic effects of the crisis are for the United States, it is this committee’s responsibility to also examine the broader picture.

The strategic implications here go well beyond our economic interests and can affect all transatlantic issues.  From a foreign policy standpoint, America needs a strong Europe to partner with on issues around the globe.  From Iran to Afghanistan to the Arab Spring, America needs Europe to play an increasingly active role, and a distracted, internally focused Europe will not be able to help us meet these difficult challenges. 

A protracted austerity program could also worsen the ongoing problem European NATO countries have faced in meeting their security commitments to the alliance. As we saw in Libya and in Afghanistan, the demand for a strong NATO to meet 21st century challenges is not waning. But a Europe focused solely on budget cuts will surely strain those already inadequate defense resources.  

The bottom line is America needs a strong and active European partner, and we need Europe to do what is necessary to put the financial crisis behind them. 

The United States and the transatlantic community have fought two devastating world wars and have spent countless resources over nearly six decades to help bring about a Europe that is “whole, free, and at peace.”  America has made these sacrifices because a stable, secure and prosperous Europe is in our own vital interests.

Today, Europe faces a much more complex challenge.  The forces of European instability are not war and fighting, but financial uncertainty and the specter of a continent-wide economic breakdown.  The future of Europe and the transatlantic alliance is at play. 

How Europe responds to this crisis over the next several months will have dramatic implications across the broad spectrum of U.S. interests.  This subcommittee looks forward to engaging on these critical questions in the next hour. 

We have a very distinguished panel today.  I will take a moment to introduce each of our four witnesses prior to turning it over to them for their testimony.

First on our panel today, we have Jacob Kirkegaard, a Research Fellow at the Peter G. Peterson Institute for International Economics, where he has served since 2002.  Mr. Kirkegaard comes to us from Denmark, and is a widely acclaimed author and an expert in European economies, reform, and high-skilled immigration.

Next, we have Mr. Bruce Stokes, who is currently the Senior Transatlantic Fellow for Economics at the German Marshall Fund – one of the premier transatlantic policy institutions in the world today.  Mr. Stokes is a renowned former international economics columnist for the National Journal, where he remains a contributing editor. 

Today, we also have Dr. Desmond Lachman, a Resident Fellow at the American Enterprise Institute.  Lachman has a PhD in Economics from Cambridge University and previously served as managing director and chief emerging market economic strategist at Salomon Smith Barney and also as Deputy Director at the IMF.

Finally, we have Dr. David Gordon, the current Head of Research and Director of Global Macro Analysis at the Eurasia Group.  Prior to his current position, David spent more than a decade working on U.S. foreign and economic policy at the highest levels of our government, including the State Department, the CIA, and at the National Intelligence Council.

Thank you all for being here.  We look forward to hearing from each of you. 

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