On November 9, Domenico Lombardi took your questions on the impact of the crisis in Greece and the eurozone on the U.S. economy, in a live web chat moderated by POLITICO.
12:30 Vivyan Tran: Welcome everyone, let’s get the chat started.
12:30 Comment From Anne: How is the crisis in Europe affecting the United States?
12:33 Domenico Lombardi: Through a broad increase in uncertainty that will delay badly needed new hiring as well as investment. Other channels are declining exports to the euro area (which now account for 10% of U.S. total goods exports) and the banking system (about 30% of its total foreign exposure).
12:33 Comment From Don: What does the current crisis say about the long-term stability of the eurozone? To survive will the eurozone countries need to integrate even more?
12:34 Domenico Lombardi: It is difficult to pool monetary sovereignty if fiscal and structural policies are decentralized and not effectively coordinated.
12:34 Comment From Sally: After the crisis is resolved in Greece, what actions will the eurozone countries need to take in Italy?
12:36 Domenico Lombardi: It is not really a question of “after.” As things stand right now, there is a need to stabilize Italy, settle the Greek crisis and formulate a credible strategy for addressing the euro-area crisis as a whole. It is no longer a crisis of Greece but of the euro area as a whole.
12:36 Comment From Bob E: Should the U.S. be playing a more active role in trying to shore up the solvency of states like Greece, Italy and Spain?
12:37 Domenico Lombardi: The United States has been playing a very proactive role from day one, recognizing the huge scope for spillovers that the crisis could have. But there is no way, in the end, to force sovereign governments to do something that they do not want to do. The Europeans have been lagging systematically behind the curve with effects that are now evident to everybody.
12:37 Comment From Tony: Are any American sectors being hurt especially hard because of the crisis in the eurozone?
12:38 Domenico Lombardi: Exports to Europe may slow down significantly in the next few months following the recession Europe is dipping into. In Indianapolis, a hub for U.S. pharmaceutical exports to Europe, the industry has already suffered three consecutive quarters of double-digit job losses.
12:39 Comment From Betty: Does the eurozone crisis have roots in the United States?
12:41 Domenico Lombardi: The sub-prime crisis and its ramifications led many governments around the world to expand their fiscal stance. As some European governments were already indebted, this provided the trigger for this latest crisis. The crisis, however, is rooted in the shortcomings of the euro-area architecture and in the inconsistent and unsustainable policies run by some of its members.
12:41 Comment From Stu: Are there any countries ready to leave the euro?
12:43 Domenico Lombardi: Not yet. In the short run, any exit will be heavily discouraged by the other euro-area countries as this could trigger further panic and uncertainty about the prospect of the euro itself. In the long run, no doubt, some countries will ask themselves if it is worth it to stay or to leave.
12:43 Comment From Thurber: With Italian bond prices rising beyond 7%, what is the likelihood that Italy will follow in Greece’s footsteps and need to be bailed out? Can Europe even bail out an economy as large as Italy’s?
12:45 Domenico Lombardi: The problem is that Italy can’t be bailed out through traditional/conventional instruments such as an IMF-EFSF program as both institutions have limited firepower. Only the ECB can stabilize market pressure, but the role of lender of last resort is not in its mandate. This is not to say that the Italian authorities should not act as soon as possible. But, given where we are right now, that alone may not be sufficient anymore.
12:46 Comment From Jackie: Do you see an end in the chaos anytime soon?
12:47 Domenico Lombardi: The containment of the Italian crisis may only come from an outright political commitment to a stabilization program by the Italian authorities backed by the (potential) full engagement of the ECB.
12:47 Comment From Ian Talley: What is the likelihood of Italy needing an IMF loan, what would bring it about and would it give credibility to an EFSF program?
12:49 Domenico Lombardi: Italy does need, at this stage, a strong commitment device. An IMF program may do just that by attempting to insulate the implementation of a reformist agenda from the current spike in the volatility of Italian politics.
12:49 Comment From Mark, Greenbelt: Who’s in more trouble now? Greece or Italy? And what other European countries are still on the brink?
12:50 Domenico Lombardi: The big difference is that nothing is lost yet for Italy—for Greece, instead, it is.
12:50 Guest: What do you think about a free trade initiative between the U.S. and the EU to revamp growth?
12:50 Domenico Lombardi: There is merit but right now it is not perceived to be an urgent agenda item in the bilateral relationship.
12:50 Comment From Jackie: Recession?
12:51 Domenico Lombardi: Very much so, certainly in Europe. In the United States, there is more room.
12:51 Jennifer S: Does Obama have a role to play? What did he do at the G-20 meeting, and was he effective?
12:53 Domenico Lombardi: The U.S. administration is putting huge pressure on the Europeans. The U.S. Fed is easing euro-area funding pressure in the USD interbank market. That said, the ball is in the European camp. Once they come out with a comprehensive strategy, the United States may exert an important role in catalyzing funding, if there will be such a need—possibly through the IMF.
12:54 Comment From Robert French: Realistically, what policies can the U.S. follow to help the eurozone countries?
12:54 Domenico Lombardi: The United States already imports too much. But China can increase its net imports from the rest of the world. Europe (and the United States) will likely benefit from it.
12:55 Comment From Dan: If Greece leaves the eurozone, will it set a precedent, or will it be seen as an aberration?
12:55 Domenico Lombardi: It would then be impossible to draw the line. Will Italy remain or exit? What about Portugal and Spain…
12:56 Comment From Grey Treed: As a result of this crisis do you foresee the beginning of the end for the EU?
12:56 Domenico Lombardi: As a free trade area, Europe has largely been a success. As a monetary union, there is a lot to be reformed if they want to keep it.
12:57 Comment From Samuel: Which of the European nations are the next ones on the brink of economic crisis, in your opinion?
12:57 Domenico Lombardi: If there is fallout in Italy, I am afraid not even Germany will be safe.
12:58 Comment From D. Levy: It seems Germany is always bailing out the weaker economies. Is public sentiment in Germany going to change that?
12:59 Domenico Lombardi: Not really. Germany has enjoyed substantial benefits from the monetary union. Its high current account surplus has benefited from the lack of a compensatory mechanism given the appreciation of the euro. This is also a subsidy, even though not of a fiscal nature.
1:00 Comment From Reid: Can restoring Italy’s credibility spur eurozone reform?
1:00 Domenico Lombardi: Yes, but only through external commitment devices such as the IMF.
1:00 Vivyan Tran: Thanks for the questions everyone. We’ll be back next week.