Mr. Lew Goes to Europe

America's new Treasury Secretary, Jack Lew, flew to Brussels Sunday night, his first trip to Europe as Secretary (though not his first official trip abroad, which was to China). He is meeting today with EU officials, including European Council President Herman Van Rompuy, Olli Rehn and Jose Manuel Barroso from the European Commission, then on to Frankfurt to meet with Mario Draghi, President of the European Central Bank, and finally to Berlin to see Wolfgang Schaeuble, the German finance minister, and to Paris for discussions with Pierre Moscovici, the French finance minister.

One wonders how Mr. Lew plans to cover - in the 48 hours allotted for the tour - even a few of the most pressing European issues. Consider:  ​

-​ Last month's EU/IMF 17 billion euro bail-out of the Cyprus government and its commercial banks, under which a portion of uninsured deposits are to form part of the funding for the rescue package, suggests depositors in other over-leveraged Euro Zone banks could also lose out. Confidence in the safety of deposits, a fundamental in any developed economy, has thus been eroded significantly. Contagion from Cyprus may be felt first in Slovenia, whose mostly state-owned banks are holding assets severely impaired by a property crash similar to what occurred in Spain.

- Italy, where fiscal re-balancing and economic re-structuring are urgently required, is still without an elected government following February's national election. Political deadlock appears intractable, and even new elections, at this point the only apparent way out, but possibly months away, may not help, especially if Mr. Grillo's anti-establishment 5-Star Movement were to gain more seats in Parliament; ​

- Portugal and Greece continue to struggle with implementing the austerity measures imposed under their EU/IMF financial bail-outs.​ Portugal's Constitutional Court dealt a blow to the process, ruling on Friday that wage and pension cuts to public sector workers were unlawful. This undermines the credibility of the the country's efforts to ultimately regain full access to the bond markets. Prime Minister Coelho responded to the ruling saying it presented "serious obstacles and risks" to the 2013 and 2014 budgets and had "very serious consequences". Such consequences are not likely to be confined to Portugal.

- ​France - where a political scandal is deepening as its budget minister, caught in a "series of lies" regarding an undeclared personal bank account in Switzerland, was forced to resign - has slipped into recession. Unemployment, above 10%, keeps rising. Socialist President Hollande is attempting to reign in public spending (which is the equivalent of 57% of GDP, the highest ratio in the Euro Zone), but has given up on his promise to get the deficit below 3% of GDP in 2013. He faces a deeply skeptical electorate and a plummeting approval rating, to a record low of 22% in the latest opinion poll. 

- Germany, whose electorate is also highly skeptical, and weary - of providing further bail-out funds to stagnant periphery countries - is not yet in recession, but is likely to achieve only marginal GDP growth in 2013. Chancellor Merkel faces re-election this fall, so further, fundamental policy initiatives from Brussels and the ECB - such as a banking union, and at least partial mutualization of sovereign debt - cannot be expected until the election outcome is clear. 

In such an economic environment, Mr. Lew, apparently increasingly concerned about the impact of Europe's recession, and growing social unrest, on the United States and the rest of the world, will reportedly be advising his European hosts to back away from draconian austerity and  opt for policies to promote growth.​ "We have an immense stake in Europe's health and stability," Mr. Lew said. "I was particularly interested in our European partners' plans to strengthen sources of demand at a time of rising unemployment." The Germans (and other creditor nations in the North, such as the Finns and the Dutch) aren't likely to listen until budget and debt positions in their southern neighbors have improved substantially.

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