For Carl Tannenbaum, senior vice president and chief economist at Northern Trust, Europe remains a key risk to the global economy. "As opposed to the United States, Europe has contractionary credit conditions, contractionary fiscal policy, and a central bank that is very limited in its powers," he said at Chicago Booth’s Economic Outlook 2013 in Chicago.
Tannenbaum noted that there are several key challenges facing the region: troubled or nationalized banks in almost every European country, austerity measures that may be appropriate in some cases but not in others, and demographics putting stress on public pension programs.
There are great incentives for northern Eurozone economies to preserve the single currency, given how much their exports have expanded since currency parity began. But Tannenbaum wonders whether an orderly exit of Greece from the Eurozone is possible, and whether a Greek exit would prompt further questions about other countries, such as Spain. "The worst outcome for Europe would be staying together ... excepting the case where it comes apart," he said, paraphrasing Winston Churchill.
Looking to the US, Tannenbaum said that household balance sheet repair is very much a work in progress. For many households, housing had been the primary savings vehicle for retirement, college, and other assets. A substantial fraction of US households have only very modest savings, and pension funds many plan to rely on are somewhat to severely underfunded. "There is a vast tract of Americans who are financially unprepared for retirement. The saving that they will have to undertake in the years ahead may place important limits on consumption and potential economic growth," said Tannenbaum.
Regulatory uncertainty facing mortgage lenders could also hamper a recovery, he said. Lenders are still very cautious, partly because of policy issues that constrain their activity. Prospective actions by the new Consumer Financial Protection Bureau create uncertainty in the lending industry, as does the future of government-sponsored enterprises such as Freddie Mac, Fannie Mae, and the Federal Housing Administration. Tannenbaum said, "America is long overdue for a healthy conversation about the scope of housing policy."