Obama to the Rescue? The G8 at Camp David

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Today’s meeting of the world’s largest economies at the Camp David will be one of the biggest gatherings ever at the presidential retreat and one of the most important. What’s at stake?

  1. Will the recent slowdown in US economic recovery and the faltering world stock markets regain strength and confidence?

 Necessary Condition for a Resolution: G8 must establish a framework for a lasting solution to the euro zone crisis. Lately, key US economic indicators have been more stationary than forward moving. Furthermore, for 12 days running the stock market has been hammered, mainly due to negative expectations regarding the euro zone crisis. If not rectified quickly, this will bleed into consumer and investor confidence and cause a more permanent slowdown in economic performance and job creation.

      2.  Will the upcoming elections in Greece lead to the country’s exit from the euro zone?

 Necessary Condition for a Resolution: The forthcoming political election in Greece should not lead to an annulment of the austerity measures agreed upon by the Parliament in February as a condition for financial assistance. At the upcoming elections in Greece, voters will likely choose leftist candidate Alexis Tsipras. He has vowed to tear up the austerity agreement passed by the Parliament in February (as a condition for additional 130 billion euros), and if necessary back out of the euro zone altogether.

The agreement requires minimum wages to be cut by 22%, pensions to be reduced by 300 million euros, cuts in health and defense spending and many state-owned companies to be privatized. Tsipras has vowed to exit and use Greece’s scarce resources to pay its workers, rather than paying back creditors. The framework for a compromise position must be hammered out by the G8.

     3.    Will economic bailout in the euro zone be dominated by austerity policies or growth policies?

 Necessary Condition for a Resolution: A compromise must be struck upon between Germany (which backs strict austerity measures as a precondition for financial assistance) and France and the US (who support greater emphasis on growth policies to resolve the euro zone crisis). Chancellor Merkel insists that Portugal must abide by agreed-upon austerity measures for Germany’s continued support. Newly elected French President François Holland and President Obama disagree with Germany on this point.

They point out that austerity measures have devastated the five euro zone economies where they have been imposed, which makes the mandated progress towards a balance budget impossible. It also thrusts the entire zone into a potentially deep recession.  For example, while average unemployment in the euro zone is 11%, it is above 20% in Greece and Spain and above 14% in Portugal and Ireland.

     4.  Will contagion from the euro zone crisis will unravel global financial markets and hurt US recovery?

 Necessary Condition for a Resolution: The G8 must establish a viable strategy to stop the run-on banks by depositors in Greece, Spain and Portugal. The rumor mill is wild with stories about depositors making panic withdrawals from banks in Greece, Spain and Italy. Although the rumors are unsubstantiated, it is a fact that Greece’s rating has been downgraded further into junk status in anticipation of the country defaulting.

Furthermore, markets in Japan, which are heavily dependent upon euro zone trading, are behaving in ways that suggest the worst is about to happen. The US will not escape the fallout of a default either. The five largest financial institutions in America are heavily invested in the government bonds of Greece, Spain, Portugal, Ireland and Italy.

      5.  Will President Obama’s bid for a second term in the White House be derailed by the euro zone crisis?

 Necessary Condition for a Resolution: President Obama must exercise the highest order of leadership finesse and reconcile differences among European countries that the countries themselves have been unable to reconcile. The outcome will ultimately determine whether US investors have sufficient confidence to create more jobs – without which the President’s reelection will be seriously imperiled.

 These issues will be debated as President Obama plays host to key players upon the world stage, e.g. German Chancellor Angela Merkel, newly elected French President François Holland and Russian Prime Minister Dmitry Medvedev (who will attend in place of Russian Pres. Vladimir Putin).

The President’s skills will be tested. The stakes are extremely high, and the outcome will largely determine whether the slowing US economy has encountered a small bump on the road to recovery or more serious economic barricade- one that will influence the outcome of the November elections.

Last modified: May 18, 2012

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