(Bloomberg News) Former Federal Reserve Chairman Alan 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 earnings.
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 Washington.
"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, "obviously."
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.