U.S. Treasury Secretary Timothy Geithner arrived in Germany on Tuesday for a three-day blitz of euro zone officials to urge them to take decisive action to backstop their currency union and resolve a crushing debt crisis.
Geithner will press French President Nicolas Sarkozy, the new leaders of Spain and Italy and Germany's finance minister to agree at a crucial European Union summit on Friday to take steps that will give markets confidence that no euro-zone countries will default, and that the region's banks will stay solvent.
Geithner has made several trips to Europe in recent months as U.S. concerns over the crisis grow and, judging by comments from both him and President Barack Obama, the Treasury Secretary may add to a growing chorus calling for the European Central Bank to take more decisive action to resolve the crisis.
The need for action was underscored by Standard & Poor's warning on Monday that 15 of the 17 euro zone countries now face an unprecedented mass downgrade if they fail to reach a satisfactory agreement at the Brussels summit -- all the way up to AAA-rated Germany and France.
Obama's administration is increasingly concerned that Europe's crisis will strike a substantial blow to the U.S. economy, halting still-weak job growth and potentially threatening Obama's re-election hopes.
The Federal Reserve joined with the European Central Bank and others in action to ease dollar funding strains a week ago and Obama and Geithner have both pointed to the option of the ECB backstopping European governments and the banking system. That idea is viewed by many economists as the key to any comprehensive solution to the crisis, but resisted by Germany.
With this trip, I think the Secretary will bring the message that time is running out and this is the last chance the Europeans have to fix the situation before we have a full- blown systemic crisis, said Domenico Lombardi, a former International Monetary Fund board member who is now a scholar at the Brookings Institution in Washington.
I think the U.S. tone will be much more firm - it has changed from being more interlocutory to more authoritative, Lombardi added.
Sarkozy and German Chancellor Angela Merkel to enforce budget discipline across the euro zone. Their proposal, announced on Monday, includes automatic penalties for states that fail to keep deficits under control and an early launch of a permanent bailout fund for euro states in distress.
In the end, the Europeans hold their fate in their hands, but the problem is their fate is our fate, said Edwin Truman, a former adviser to Geithner at the Treasury who is now a senior fellow at the Peterson Institute for International Economics in Washington.
There's no doubt that their futzing around for the last two years has adversely affected the U.S. economy -- and the world economy. One cannot say that too strongly, Truman said.
The U.S. Treasury chief began his trip by meeting European Central Bank President Mario Draghi. He declined to comment on the talks on leaving the ECB, where he spent more than 1-1/2 hours before heading to meet Bundesbank chief Jens Weidmann.
Geithner has advocated leveraging European bailout funds through the ECB to boost its capacity. Weidmann has led opposition at the ECB to it taking a broader role.
With two new Prime Ministers in Italy and Spain pushing on with reform, analysts wonder if the closer fiscal integration being discussed by Sarkozy and Merkel will provide cover for the ECB to step up buying of euro zone government bonds.
I think Geithner can provide further political weight to a more aggressive stance by the ECB, Lombardi said.
The U.S. would also need to give its approval to any solution that involved the International Monetary Fund.
Many European officials see bilateral loans to the IMF from wealthier euro zone states and key emerging markets like Brazil or China as a way to boost the Fund's capacity to bail out a larger economy like Italy or Spain.
The Treasury maintains that the IMF's resources are adequate, but now appears to be open to such bilateral loans, particularly from Europe.
The Treasury official said that there did not seem to be a case for the United States to try to augment IMF resources with its own funds, and it still sees the IMF as a second line of defence. But the official added that loans from European national central banks could help satisfy demands that the region use more of its own money to tame the crisis.
In effect, Geithner could agree not to block such an effort to boost IMF resources if he were satisfied that European leaders were taking strong enough action. As the largest contributor to the Fund, Washington has effective veto power over major changes to the way it operates.
Geithner on Tuesday afternoon will meet with German Finance Minister Wolfgang Schaeuble and the two will briefly meet with reporters afterwards. He will meet Sarkozy and French Finance Minister Francois Baroin in Paris on Wednesday.
(Additional reporting by Glenn Somerville; editing by Patrick Graham)