US and EU - Misery Loves Company

(Herald Tribune) -- As Treasury Secretary Henry Paulson Jr. travels through Europe this week, he wants to reassure jittery audiences that the United States will right its economy and its financial markets.

But with both sides of the Atlantic now suffering from a similar combination of sagging growth, rising inflation and shaky banks, Paulson's visit is turning into a case of misery loves company.

"There's no doubt that the second quarter will be a tough quarter," Paulson said during an interview after meeting with the president of the European Central Bank, Jean-Claude Trichet. "There's no doubt in any of our minds that the high oil prices are going to have an impact."

The meeting in Frankfurt came on a day when the European economy, which had recently been more resilient than that of the United States, began showing signs of an American-style slump.

Manufacturing activity in the 15 countries that use the euro shrank in June for the first time in three years, according to an influential survey of purchasing managers released Tuesday.

"I've never been one to accept the decoupling theory," Paulson said, referring to the idea Europe was immune to a malaise in the United States. "In a global world, we're all interrelated."

A weaker Europe has implications for the United States, Paulson said, because the United States has benefited from buoyant economic conditions overseas, in particular through exports.

Now, he said, emerging countries would provide the biggest lift to the global economy. Citing Russia, which he visited Monday, Paulson said that it and other nations with similar economic prospects were still growing robustly, though they, too, are grappling with rising fuel and food prices.

Fears of an inflationary spiral have prompted the European Central Bank to signal that it will raise interest rates this week. Trichet, has come under intense pressure from European leaders not to tighten credit at a time of weakening economic growth. But that is not expected to deter the bank.

Higher rates are likely to drive the euro up against the dollar because, with the Federal Reserve so far resisting a rate increase, it would widen the disparity in borrowing costs between Europe, where the ECB now has a benchmark rate at 4 percent, and the United States, where the Fed's base rate is 2 percent.

Paulson reaffirmed the importance of a strong dollar on his trip, which is scheduled to end Thursday in London.