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US Can Recover, 'Extreme Action' Needed in Europe: Economist

The US and European Union pose divergent threats to a global economic recovery and despite weak growth in the United States, the euro zone debt crisis is more likely to impede a recovery, Paul Donovan, deputy head of Global Economics told CNBC.

German Chancellor Angela Merkel speaks next to France's president Nicolas Sarkozy at the Elysee presidential palace in Paris on August 16, 2011 after a meeting between the two leaders on debt crisis.
Patrick Kovarik | AFP | Getty Images
German Chancellor Angela Merkel speaks next to France's president Nicolas Sarkozy at the Elysee presidential palace in Paris on August 16, 2011 after a meeting between the two leaders on debt crisis.

"Let’s have a quick reality check on the United States, every single real economic data point this month, every single data release on the real economy, has come out better than expected… better than the market was looking for," Donovan said.

He added there were reasons to be optimistic about a recovery in the US and the media had overblown the significance of the debt crisis, sparking negative market sentiment.

"The sentiment data has been negative and why is that? Because you have wall to wall coverage across all media in the last month telling you that the debt crisis is huge," he said.

"There are problems in the States, but the consumer's spending more money, they've got more income, they've got more jobs, the banks at least in the last survey were saying they're prepared to lend more money… it's not a strong recovery, but at the same time what I think we've got at the moment is excessive," he explained.

'Broken' Euro

Donovan described the euro as a "broken" currency and he criticized politicians for being out of touch and therefore unable to find a solution to the debt crisis.

"Look at Europe, we've got a far bigger issue there, we've got a monetary union which doesn't work and politicians that are about two years behind where they need to be at the very least," he said.

"We've known that the euro was broken since 1996 when it became evident who was going to join it's been clear that it's broken.

"The banking system's got problems… we need a fiscal union, we need an integrated banking structure and we need people like Stark of the ECB to shut up "If we can get that over the course of the next couple of years, then we can start thinking more positively on Europe," he added.

Following a meeting in Paris on Tuesday between German Chancellor Angela Merkel and French President Nicholas Sarkozy, the leaders announced they would float proposals to introduce a financial transaction tax across the European Union, an idea Donovan described as "absolutely disastrous".

"I work for a Swiss bank so frankly I want the euro zone to do this, this will be great as far as working for a Swiss bank in the UK is concerned because that's illiquidity in markets, increased volatility in markets, increased risk premium, increased funding costs for corporates and for governments in the euro zone. I can't imagine a more ridiculous suggestion," he said.

He added that the "grubby business of politics" stifled the possibility of a solution to the crisis and European leaders were more concerned with political point scoring than economic solutions.

"What we want is a European statesperson. Not a politician, a statesperson to come out, take the lead and say: You know what? I'm going to do what is in the interests of Europe," Donovan suggested.

However, he said as the situation becomes "unremittingly bad" politicians will be forced to take "extreme action" in response to extreme volatility in global markets.

Contact Europe: Economy

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