(Washington, D.C.) – U.S. Senator Jeanne Shaheen (D-NH), Chair of the Senate Foreign Relations Subcommittee on European Affairs, today held a hearing to examine the ongoing European debt crisis and its economic and strategic implications for the United States. Shaheen asked the hearing’s panel of experts to provide an update on the situation in Europe and to assess what lessons could be drawn from the response to the crisis.
“How Europe responds to this crisis and the lessons we draw from events over the last several years will have dramatic implications – not only for the future of Europe – but also across the broad spectrum of U.S.-Europe relations, including political, financial, trade and security issues,” Shaheen said during opening remarks. “We need to coordinate where we can and support our European partners as they do what is necessary to put this crisis behind them and get back to creating growth and jobs on both sides of the Atlantic.”
Today’s hearing was the third hosted by Senator Shaheen on the transatlantic economy and the financial crisis in Europe. She has repeatedly highlighted that the uncertainty in Europe has served to slow the American economy. In today’s hearing, Shaheen emphasized the dangers of excessive spending and unsustainable debt in European countries and highlighted the negative impact of solutions that have relied on deep short-term cuts at the expense of economic growth.
“The fact is that slow growth, several banking crises, real estate bubbles, a lack of competitiveness, institutional problems and high debt have all contributed to the problems we face in Europe today,” Shaheen said. “Understanding this fact leads us to another lesson. Austerity alone cannot solve this complex series of problems. Long-term growth, competitiveness, and structural reform all need to play a role in the solution.”
In their prepared testimony, panelists underscored the importance of the European economy to U.S. interests and the complexity of the challenges facing European leaders.
“Despite the difficulties of the Eurozone crisis, Europe remains a key foreign policy partner of the United States, as is demonstrated by Iran, Syria, and Afghanistan, among US foreign policy priorities,” said Frances Burwell, Vice President and Director, Transatlantic Relations, Atlantic Council. “Even with the crisis, Europe remains the largest economy in the world, and the United States’ leading partner in trade and investment.”
“A breakup of the Eurozone would be disastrous for Europeans and to a large extent for the global economy,” said Nicolas Veron, Visiting Fellow, Peterson Institute for International Economics, and Senior Fellow, Bruegel. “The choices facing Europe’s leaders and citizens are daunting … Yet I believe it is not too late for Europeans to take actions to ensure the survival, sustainability and success of their monetary and economic union. I trust and expect such decisions to be made.”
“There is no doubt that European political leaders are highly committed to keeping the euro area together, and so far, there is widespread support from business leaders and the population to maintain it,” said Simon Johnson, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan School of Management. “There is also, rightly, great fear that disorderly collapse of the euro area would impose untold costs on the global economy.”
Below is Shaheen’s opening statement, as submitted for the record.
The Senate Foreign Relations Subcommittee on European Affairs meets today to discuss one of the most critical issues facing the global economy today: the ongoing crisis in the Eurozone. How Europe responds to this crisis and the lessons we draw from these events will have dramatic implications, not only for the future of Europe, but also across the broad spectrum of U.S.-Europe relations, including political, financial, trade, and security issues.
Reflecting the importance of this issue to the United States, this is the third hearing we have held in this Subcommittee on the transatlantic economic and trade relationship in the wake of this ongoing crisis. Today, we have an impressive panel of witnesses to guide us through some of the lessons learned from this continuously evolving situation and to assess the outlook for Europe as we consider the near-term future.
In today’s global economy, Europe remains by far America’s biggest and most important ally. Europe is the United States’ largest trading partner and export market. Together, the transatlantic economy accounts for over half of world GDP, one-third of world trade and three-quarters of global financial services. The businesses and employers in most of our states rely heavily on investment from European companies and purchases by European consumers. In New Hampshire, three of the top six export markets for our businesses are in Europe, and cross-border investments mean thousands of jobs in my state.
If there is one lesson we have learned over the past year, it is that Europe continues to matter a great deal to the U.S. economic engine and our prospects for growth. We have seen the Eurozone crisis and economic contraction in Europe drag down the American recovery with transatlantic trade and investment flows slowing and financial fears in Europe contributing to volatility in U.S. capital markets. As President Obama suggested this week, “Europe is still a challenge” and as a result, the United States is “going to have some continued headwinds.”
Since 2009, Eurozone leaders have undertaken a variety of efforts aimed at curbing the negative effects of the crisis and stemming possible contagion to larger Eurozone countries, including Italy and Spain. We have seen financial assistance packages for Greece, Portugal, and Ireland, a significant restructuring of Greek debt and an increase in the firepower of a permanent Europe-wide rescue fund. In addition, the European Central Bank (ECB) took unprecedented steps over the winter to increase liquidity, including the offer of unlimited short-term loans to European banks, which has pumped more than $1 trillion of capital into the banking system.
At the latest of a round of critical summits over the last year, Eurozone members agreed to begin moving toward a unified banking system and a single bank supervisor for the Eurozone. Starting with ailing Spanish banks, leaders also attempted to break the “vicious cycle” between banks and sovereigns by agreeing to inject cash directly into banks, rather than putting governments on the hook for bailout funds.
Despite these efforts, we have not seen a calming of European markets for any significant amount of time, and the euro seems to be entering a new phase of difficulties.
Spanish and Italian debt is coming under renewed attack by the markets. There are rising questions about Greece’s ability to meet its debt conditions. Europe’s banking woes continue to fester. Last week, Moody’s downgraded its outlook from stable to negative for Germany, the Netherlands, and Luxembourg.
It is reassuring that the ECB President last week said that the bank will do “whatever it takes” within its mandate to preserve the euro. In addition, Chancellor Merkel’s call for “more Europe” and a fiscal and political union indicate German leadership interest in moving toward further European integration. These important statements have calmed nervous investors and may provide some room for governments to take action in the weeks and months ahead.
As Europe struggles to get ahead of this issue, it is incumbent upon us to draw lessons from the ongoing struggles.
First, it is important to recognize that this crisis is not the result of any single cause. Some continue to argue that Europe got here because of runaway spending. Now, that is an easy bumper sticker response, but the truth is much more complex. We are witnessing a multifaceted, interrelated series of crises, including financial, political and fiscal problems.
There is little doubt that in Greece, profligate spending and a lack of a mature revenue generating system resulted in unsustainable debt and sky-rocketing borrowing rates. However, the same cannot be said for Spain, which was previously running a budget surplus and in 2011, had a manageable public debt total of around 68 percent of GDP. Despite the relatively solid fiscal situation, Spain now also faces market pressures. The fact is that slow growth, several banking crises, real estate bubbles, a lack of competitiveness, institutional problems and high debt have all contributed to the problems we face today.
Understanding this fact leads to another lesson: austerity alone cannot solve this complex series of problems. Long-term growth, competitiveness, and structural reform all need to play a role in the solution. Austerity-only will not work and can lead to steeper borrowing rates and lower revenues, making the longer-term challenges even more difficult.
One other important lesson for the United States is that we cannot wait to tackle our long-term budget challenges. By the time the markets start raising questions, it becomes much more difficult to restore credibility. Delay or piecemeal reforms can breed uncertainty and erode market confidence. Spain, again, is an excellent example where a new reforming government came to power amid rising costs of borrowing. The Rajoy Administration cut spending, engaged in labor reforms and secured significant support for its weak banks. Despite the recent impressive efforts, Spain continues today to face pressure from bond markets, where on July 25th, ten-year bonds reached a euro record of 7.75 percent.
As we move forward, one unanswered question remains for policymakers here in the U.S.: Considering the importance of Europe to America’s economy, what should we be doing on our side of the Atlantic? I asked this exact question at our previous hearing. Each one of our expert witnesses, from across the political spectrum, agreed that the best action we can take for Europe and for the global economy is to get our own fiscal house in order. Domestic and international markets linked closely to the U.S. consumer base would respond positively to a long-term debt and deficit deal.
It is instructive that markets in Europe reacted quite negatively to the poor way Congress handled the raising of the debt limit last summer. In fact, the price of Spanish and Italian borrowing spiked to well above six percent in the lead-up to our near-default. Immediately following the July 31 debt deal in Congress, bond markets throughout Europe quickly recovered to a much more sustainable five percent. This suggests that a long-term deal in the U.S. would have positive consequences for Europe, which would lead to even further positive movement here in America.
This is why we need to continue to work across the aisle and across the Capitol to get to a balanced, long-term debt deal. As is the case in Europe, our debt deal last year only bought us a little time. We need to act.
At the end of the day, the bottom line is that America needs a strong Europe, and vice versa. After two devastating world wars, the United States and the transatlantic community have spent countless resources over nearly six decades to help bring about a Europe that is “whole, free, and at peace.” America made these commitments because a stable, secure and prosperous Europe is in our own vital interests.
We need to coordinate where we can to support our European partners as they do what is necessary to put these crises behind them and resume creating growth and jobs on both sides of the Atlantic.
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