“If European economies slow more than they already have, or especially if there is some greater tumult in the European financial system, that will be bad news for the US economy,” Mr. Elmendorf said Wednesday at a Monitor-hosted breakfast for reporters.
There were signs this week that the European debt crisis, which first affected Greece, was spreading elsewhere on the continent. Borrowing costs for both Italy and Spain rose sharply, indicating lack of investor confidence that the problem can be contained. One key concern is whether Greece will remain in the eurozone after a scheduled June 17 election.
“Although the European governments have managed a succession of times to pull their economies and their financial system back from the brink, the challenges they face are larger than ever now and getting out of their current situation is very difficult, and whether they will be able to preserve the euro I think is unclear,” Elmendorf said.
His concerns are shared by International Monetary Fund Managing Director Christine Lagarde. In a speech Tuesday she said, “Tensions are on the rise again, and financial stability risks have once more moved front and center. Great uncertainty hangs over global prospects.”
The CBO director said “there is one silver lining in the cloud.” He noted that fears about the stability of the European financial system “tend to increase the demand for US Treasury securities and thus push down the interest rates on those securities, push down the cost of our borrowing.”
Still, the risks to the US economy from European financial upheaval outweigh any positive effects. “The fears of what is happening in Europe and what might happen in Europe are weighing on our stock market. They are weighing on business confidence and thus on hiring and investment in this country. And again, if something goes even more wrong there, that can reduce the exports that we can send to Europe and could cause a great deal of further problems in our own financial system,” he said.
The CBO is in the process of updating its economic forecast for release later this summer. It will be difficult to factor the European debt situation into the CBO forecast. “How to quantify that … either the risk of something worse happening or the effects on the US economy is very difficult, “ Elmendorf said.