WASHINGTON (Reuters) – Europe’s debt crisis has frayed nerves around the world for months. Now signs of weakness in the U.S. jobs market and in Chinese factory output give policymakers even more reason to be afraid.
A dark cloud will hang over U.S. Federal Reserve Chairman Ben Bernanke when he testifies before lawmakers on Thursday.
As if the euro zone’s struggle to avoid dissolution were not enough, U.S. job creation slowed for the fourth straight month in May.
“It would be hard to believe the Fed is not concerned,” said Thomas Lam, an economist at DMG & Partners Securities in Singapore.
The United States was a relative bright spot in the global economy over the past year. But last week, good economic news was hard to find in almost any corner of the world.
India’s first quarter economic growth sunk to a nine-year low, while a gauge of euro zone manufacturing also slipped.
Especially worrisome for the global economy, a measure of activity at China’s private factories contracted for the seventh month in May.
That could help push China – the biggest single provider of growth in the global economy – to launch a stimulus program to combat a slowdown.
Just as a sour economy looms over U.S. President Barack Obama’s November re-election bid, the possibility of rising joblessness in China frightens the ruling Communist Party ahead of a power transition that gets under way later this year.
In his testimony to Congress, Bernanke could provide clues on what the Fed could do to help growth, especially if Europe’s crisis grows more acute. Whether the Fed acts at its next meeting on June 19-20 could well depend on events in Europe.
With Greece‘s membership in the currency union possibly hanging in the balance of a June 17 election, European politicians are struggling to put together plans that would keep Greece from abandoning the euro and other countries, including Spain, from following it out.
Top European Union officials are now openly questioning whether the currency union will even survive, a warning that time is running out for the region to resolve its debt woes.
“It’s crunch time,” said Nicolas Veron, a specialist on European banking at the Peterson Institute for International Economics.
The European Central Bank will likely keep interest rates steady at a Wednesday meeting to keep political leaders under pressure to find a solution to the crisis.
The European Commission has suggested using a euro zone rescue fund to directly recapitalize distressed banks. That could be especially helpful for Spain. Bank woes there have helped push the country’s borrowing costs perilously high.
“Spain is going down the drain,” said Charles Wyplosz, a professor of international economics at Geneva’s Graduate Institute.
Madrid faces a crucial test of investor confidence when it auctions bonds on Thursday. The sale is expected to come at a hefty cost to the government after a steep selloff in debt markets over the last week pushed its borrowing costs higher.
Markets have been spooked by data showing more than 66 billion euros was withdrawn from Spanish banks and sent abroad in March, adding to nervousness over how the country will finance a 19 billion euro bailout for Bankia, its fourth-biggest lender.
Spain would prefer the ECB buy it some time by reactivating its bond-buying program. But ECB President Mario Draghi is likely to remain unflinching at a Wednesday news conference out of hope politicians can tie the region into a tighter union.
If the politicians fail, an unraveling of the euro zone could follow with potentially devastating financial consequences that could easily take a cooling global economy and plunge it into recession.
“What we’re seeing now would be a walk in the park,” said Amit Kara, an economist at UBS in London.
(Reporting by Jason Lange)