Euro zone crisis could force debt compromise, senators say

A bipartisan group of senators are expressing new urgency about resolving a looming clash over the nation’s debt this fall in the face of a European crisis they fear could threaten a repeat of the 2008 financial crisis, which caught members of Congress flat-footed.

During a closed-door meeting Tuesday afternoon, Robert Zoellick, outgoing president of the World Bank, warned a diverse group of 30 to 40 senators they should be ready to put aside partisan differences on handling the nation’s long-term debt problems before November’s presidential election, if the European crisis spirals out of control and threatens to throw the U.S. economy back into a deep recession.

“There’s substantial concern about what’s happening in Europe and whether we would be able to do what we needed to do,” Sen. Roy Blunt, Missouri Republican, after the meeting. “Everybody understands what happened in 2008 and that it would have been good if we had anticipated it rather than just muddling through.”

Sen. Bob Corker, Tennessee Republican, called the message from Mr. Zoellick a “defining moment” for debt negotiations in Washington after a year and a half of partisan impasse over where to find $1 trillion in cost savings over the next 10 years have forced Congress and the White House to punt the real haggling until after the November election.

“There’s a real sense that Europe’s economy is in a deep crisis and if it slides further it will drag down the United States even more,” retiring Sen. Joe Lieberman, Connecticut independent, said after the meeting. “Everyone seems to know that. The question is whether we’ll have the guts to do anything about it.”

Everyone who attended the meeting, including such polar political opposites as Sens. Al Franken, Minnesota Democrat, and Tom Coburn, Oklahoma Republican, emerged expressing solidarity in Congress’ ability to avert another global financial meltdown but offered no details about potential points of compromise.

Sen. Lamar Alexander, Tennessee Republican, said he would be wiling to consider “revenue raisers,” a euphemism for tax increases, only if Democrats would offer serious concession on long-term spending cuts.

Last summer’s debt talks between the White House and Republican leaders in Congress succeeded only in kicking the debt dilemma to this fall just before more than $1 trillion in across-the-board budget cuts over the next 10 years are slated to begin in 2013, and emergency and extended unemployment benefits will end.

Adding to Congress’ end-of-the-year cliff is an inevitable showdown between Democrats and Republicans over the expiration of income-tax cuts firs enacted under President George W. Bush, as well as the end of the temporary reduction in the Social Security payroll-tax reductions.

Democrats want them extended for everyone except the wealthy, while Republicans are insisting on a full renewal. President Obama agreed to renew the tax cuts in 2010 as a way to leverage other concessions from Republicans, but has since made raising taxes on the rich a major theme of his campaign.

Congress will be forced to tackle the issue either during the lame-duck session or at the beginning of the new session of Congress in January.