Posen: Eurozone Will Grow Slowly Next Few Years

A Bank of England policymaker says the efforts by European countries to rein in ballooning government debt levels will slow growth in the Euro-zone. But Adam Posen says it will not likely have a big effect on U.S. growth in the coming year. The crisis poses the biggest threat to the euro currency since it's birth 11 years ago, but Posen says its demise is very unlikely.

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RENEE MONTAGNE, host:

American economist Adam Posen has a unique view of Europe's debt crisis. Posen is an official with the Bank of England, which is like the U.S. Federal Reserve. In his job, he helps set British interest rates.

NPR's John Ydstie spoke with him about the crisis and the future of the Euro.

YDSTIE: Adam Posen says he thinks the weakness in the euro and the volatility in the financial markets since the EU rescue package was announced is not that surprising.

Mr. ADAM POSEN (Economist, Bank of England): This isn't necessarily a negative verdict on the stabilization effort. It's a negative verdict on the reality that growth is likely going to be very slow in much of the euro area for the next several years.

YDSTIE: How much will U.S. growth be affected by Europe's crisis?

Mr. POSEN: Initially, not that much. Even though we've gotten much more globalized in recent years, it's still less than 25 percent of the economy is tied up in trade. So the initial impact from Europe is not necessarily going to be that bad.

YDSTIE: After all, says Posen, money is flowing into the U.S. for safe haven. That's lowering interest rates, which should encourage investment. But he says at some point investors may get anxious about the U.S. debt and deficit problems, too, or people might just decide things are so unsettled, they should pull back and just sit on their money.

Mr. POSEN: In either of those scenarios, the U.S. hurts, and in the longer term - more than 12 months out, say. Even if neither of those terrible things happens, the fact that, you know, the second-largest global economy, the eurozone, is contracting or stagnant will not help.

YDSTIE: Posen acknowledges there's a danger that Europe could actually fall back into recession, and he says that makes the British economy very vulnerable, too.

Mr. POSEN: This is a huge risk to the UK, and it's just simply the nature of things. Sixty percent of our trade is with the euro area, so we view this as a very real risk. We're small compared to the euro area. If the euro area goes down, then that does have a huge impact on us. There's not that much we can do about it.

YDSTIE: Of course, Britain has its own currency, the pound sterling. Posen says he's not troubled by its recent decline. But the decline of the euro has been much more dramatic. In fact, former Federal Reserve Chairman Paul Volcker has suggested Europe's debt problems could cause a potential disintegration of the euro. Posen thinks that's very unlikely.

Mr. POSEN: Former Chairman Volcker's comments are looking at a worse case scenario, which I don't think is very likely, but you have to say it's certainly more likely now than it ever was at any point in the previous 11 years - the 11 years the euro existed.

YDSTIE: The problem for Europe, says Posen, is that it has no permanent mechanism to ease the severe economic pain that nations like Greece and Spain are experiencing. Unlike in the U.S., for instance, there are no federal unemployment funds flowing to regions with higher unemployment.

Europe needs to create mechanisms to funnel resources from richer countries to poorer ones, says Posen. But he acknowledges there are serious political hurdles. Despite the challenges, Posen says it's extremely unlikely the euro will disappear as a currency.

Mr. POSEN: Remember, it was only two years ago or so people were saying, oh, my God. The Euro's going to displace the dollar, and look, super models want to be paid in Euros not in dollars. I think you guys even did a story on that at one point. And it's just good to keep some perspectives, that currencies go up, currencies go down. The fundamental thing about Europe is that the euro area is going to be growing slowly in the next few years. That's the big news, and that's the sad part.

YDSTIE: Posen says it's also extremely unlikely any current member of the eurozone will give up the currency, but he says the crisis may make non-euro countries less likely to adopt to adopt it.

John Ydstie, NPR News, Washington.

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