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Thursday, May 24,2012

How Europe Could Sink Obama’s Election Chances — And What He Can Do About It

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Europe’s Greek tragedy has now entered its final act, with potentially fateful consequences for the global economy—and for Barack Obama, whose reelection may hinge on the decisions of Germany in the coming weeks. The 2012 election will pivot on the public’s evaluation of the president’s economic stewardship, and a perceptible decline in the U.S. growth rate—which a badly handled Greek exit from the Eurozone would cause—could easily spell the difference between victory and defeat. Obama’s fate, then, may well lie in Angela Merkel’s hands. That doesn’t mean, though, that there’s nothing he can do about it.

What are the economic stakes? Mark Cliffe, ING’s head of Financial Markets Research, has conducted the most detailed analysis that I know of. He examines two scenarios—a Greek exit from a Eurozone that remains intact, and an exit that triggers a complete collapse of the European monetary union. The consequences of the latter would be catastrophic. In the first year alone, Eurozone GDP would fall by 9 percent. Inflation in the “peripheral economies” such as Spain and Portugal would head toward double digits, while the Eurozone core—especially Germany—would suffer a “deflationary shock.” Because the dollar would surge in relation to whatever national currencies might emerge, the United States would undergo that shock as well, and the exchange-rate jolt to U.S. competitiveness would reduce the odds of a sustained recovery in U.S. exports—a cornerstone of Obama’s growth strategy.


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