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Lew's Europe Visit Comes at a Critical Time for Euro

President Barack Obama and White House Chief of Staff Jack Lew.
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President Barack Obama and White House Chief of Staff Jack Lew.

On Sunday night Jack Lew will board a flight for his first visit to Europe as U.S. Treasury Secretary. The two day visit will see Mr Lew meeting with Olli Rehn and Jose Manuel Barroso from the European Commission, Mario Draghi at the European Central Bank followed by flying visits to the finance ministers of Germany and France in Berlin and Paris.

Mr Lew is likely to choose his words carefully in three press conferences he is due to hold in Brussels on Monday, Berlin on Tuesday morning and Paris on Tuesday afternoon in a bid not to offend his hosts and become too closely associated with their many problems.

You can expect praise for the European Central Bank and its leader Mario Draghi who Lew will meet on Monday afternoon in the most low key of his four meetings while in Europe.

Draghi's unconventional measures aimed at restoring confidence in the euro late last year meant the bailout for Cyprus that was paid for in part by confiscating cash directly from accounts of rich depositors in the country didn't lead to major financial volatility.

Those measures have also bought time for Europe's politicians to get their house in order.

Behind closed doors both Lew and Draghi are likely to be asking each other if there is any hope of Europe's leaders actually getting their house in order.

Mr Draghi made it clear in Thursday's ECB press conference that the buck does not stop with him and the central bank. He told Europe's political leaders that they need to begin taking the difficult decisions on structural reforms that are needed for the euro zone to regain its competitiveness.

The politicians agree with this in principle but in practice no one really knows how to push ahead with major structural reforms, keep their economies growing and get re-elected.

Germany, the most important economy in Europe and first among equals at the euro zone table is an exception to this rule. Angela Merkel is doing very well in the polls ahead of September's election and the government is set to balance its budget, something Mr Lew must wish he could say of the highly indebted Federal Government in the United States.

But while Germany has its own house in order most of its friends and neighbors are in need of a major spring cleaning. When Mr Lew meets with Wolfgang Schaeuble, the German Finance Minister in Berlin the key question has to be what role Germany will play in the clean up and how much money it is willing to find itself liable for when the bills need paying.

The answer from Schaeuble is likely to be: "as little as possible, Mr Lew."

The most urgent issue facing the euro zone is to end the uncertainty surrounding who takes losses when the next euro zone bank gets into trouble.

This weekend Olli Rehn from the European Commission said it is possible that big depositors could lose out in future bailouts, while Jens Weidmann, the chief of the Bundesbank also said Cyprus showed that banks could be wound up in the future.

In essence, both suggested that using taxpayer money to save failing banks could be a thing of the past.

Europe's policymakers don't like to hear it, but the actions in Cyprus have reduced confidence in the safety of deposits held in banks across the euro zone.

Confidence in deposits and guarantees of money kept in banks had been an undisputed success of the 5-year old debt crisis until the tiny island of Cyprus was forced to tax its uninsured depositors in its failed banks.

Total confidence that savings are not at risk can only be restored when a coherent, euro zone plan is in place.

How this process can be pushed forward while causing as little uncertainty as possible should be the key discussion Mr Lew has with European Monetary Affairs Commissioner Olli Rehn in Brussels tomorrow morning.

If this aim is going to be achieved, the Commission, IMF and the ECB need to get on the same page on how to impose austerity measures on bailed out countries like Greece, Portugal, Ireland and now Cyprus.

Reports of divisions within the troika do not help confidence when Europe's political capitals are also divided on how to deal with the debt crisis.

This division will be highlighted by Lew's final stop on his tour of Europe in Paris. France's finance minister and his boss, Francois Hollande will be hoping for some supportive words on growth over austerity.

Less than a year after being elected Hollande's popularity with voters has collapsed following a number of scandals and the realization that Hollande has no chance of delivering on the promises he made to get elected.

The French government has held up the U.S. policy of putting off austerity and continuing to borrow heavily in a bid to support growth, as an example for Europe.

Hollande has positioned himself as the voice for growth in Europe and championed a recent agreement to tackle youth employment across the continent.

But his success at the last EU heads of state summit in March in at least focusing the discussion on growth was forgotten by the next morning when euro zone finance ministers agreed a bailout deal for Cyprus that even Mario Draghi described as "not smart".

There is lots more to worry about in Europe. Italy has no government and looks unlikely to have one that will be able or willing to push through reforms anytime soon.

In Lisbon this weekend the Portuguese constitutional court rejected 1.5 billion euros ($2 billion) worth of austerity measures that need to be made as part of its bailout agreement.

The fact that the court rejected plans to scrap summer holiday bonuses for government workers and pensioners shows just how difficult it is to push through spending cuts.

Jack Lew has his own problems back at home, but he will be hoping his European tour will reduce the risks to the U.S. economy from this side of the Atlantic.

Lew's first oversees trip was to China, a relationship he knows could define his time as Treasury Secretary. Europe should remember that if it does not get its act together future Treasury Secretary's could very well visit China, India, Brazil, and Mexico before heading over to see their European counterparts.

Given the European Union combined is the world's largest economy such an outcome would be an embarrassment.

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