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Former Federal Reserve Chairman Alan Greenspan said fissures in Europe's common currency may lead to slowing in the U.S. economy.
Greenspan said fissures in Europe's common currency may lead to slowing
in the U.S. economy.
"The euro is breaking down and the process of its breaking down is
creating very considerable difficulties in the European banking system,"
Greenspan said today in Washington.
Emergency steps such as unlimited loans from the European Central
Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent
and easing lending by other Europe institutions. Greenspan said a
contraction in Europe would hurt profitability and stock values of
American companies since Europe is the target market for about 20
percent of U.S. exports and about 20 percent of foreign-affiliate
A lack of confidence in euro-denominated debt is straining the
region's banks, Greenspan said. "That stuff has always been thought of
as the ideal collateral and now it's getting highly questionable," he
said in a question-and-answer session at the Innovation Nation Forum in
"The problem is that there is a growing cleavage in the economic
and analytical and banking circles as to whether the Euro, which is the
crucial issue here, should be 17 countries with very significantly
different cultures" regarding the role of government, consumer spending
and inflation, Greenspan said.
Asked if the breakup of the euro was one possibility, he replied,
Greenspan also said he is "less worried about a double-dip than
most people are but I'll certainly grant that the odds are rising,"
referring to the chance that the U.S. economy will return to recession.
"The reason we are so sluggish is the level of uncertainty."
The economy grew at a 1.3 percent annual pace in the second quarter
of 2011, according to the Commerce Department. That followed growth of
0.4 percent in the first quarter, the slowest since the second quarter
of 2009, when the economy was still mired in recession.
One gauge of the economy's momentum, the Chicago Fed National
Activity Index, improved to minus 0.06 in July from minus 0.38 a month
earlier, the regional bank said yesterday.
The index is a weighted average of 85 economic indicators, with readings
less than zero indicating "below-trend" growth and average readings
below minus 0.7 percent over three months signaling an increasing risk
that a recession has begun, according to the Chicago Fed.
Greenspan said Aug. 7 on NBC's "Meet the Press" that the chance of
a return to recession "depends on Europe, not the United States. The
United States was actually doing relatively well, sluggish, but going
forward until Italy ran into trouble.
That destabilized the European system and the crisis reemerged."
Concern about the government debt of Italy and Spain prompted the
European Central Bank on Aug. 8 to begin buying Italian and Spanish
assets to lower their borrowing costs, as Europe's sovereign-debt crisis
nears its third year.
A four-week global equity rout has wiped about $8 trillion from
companies' market value as Europe's sovereign debt-crisis and worsening
economic reports in the U.S. raised concern the global economic recovery
is faltering. The S&P 500 fell 16 percent from July 22 through the end
of last week and its members trade at an average 11.3 times estimated
earnings, near the lowest level since March 2009.
The Standard & Poor's 500 Index advanced 0.9 percent to
1,134.34 at 10:23 a.m. in New York today.
"What has been the greatest thrust coming out of the recession has
been the extraordinary rise of stock prices in the U.S.," Greenspan, 85,
who was chairman of the central bank from
1987 to 2006, said today.
No Gold Bubble
Greenspan also said that he did not think gold, which reached a
record above $1,900 an ounce this week, was in a bubble.
"Gold, unlike all other commodities, is a currency," he said. "And
the major thrust in the demand for gold is not for jewelry. It's not for
anything other than an escape from what is perceived to be a fiat money
system, paper money, that seems to be deteriorating."
After leaving the Fed, Greenspan founded the consulting firm
Greenspan Associates and has been a consultant or adviser to Deutsche
Bank AG, Pacific Investment Management Co. and hedge fund Paulson & Co.