Could the coming European financial crisis doom President Obama? That’s a question that seems worth asking after a ten day trip to Europe this month. On June 17, voters in Greece will attempt to form a stable government; they will probably fail and Greece could be forced to leave the common European currency known as the Euro. If that happened, the Euro itself might come apart, setting off a worldwide banking panic with monumental political impacts.
It’s hard to figure how a tiny country like Greece could do all this, but the global financial system is like a knitted sweater, pull out one thread and the whole thing comes apart. If Greece is forced from the Euro, or it defaults on its monster debt, that will cause a run on Euro zone banks in weak economies like Spain, Portugal and possibly Italy. Jeremy Siegal writing last week in the Financial Times notes that, “a run on the banks in those countries would need to be met by massive loans from the European Central Bank to prevent a financial collapse.”
Sound familiar? This is what happened with the Lehman Brother bankruptcy in October 2008, requiring the now hugely unpopular American bank bailout. But the European situation is different; Europe is already an economic basket case, only Germany has enough money to save it and Germans are revolting against more bailouts.
What does all this have to do with Obama? World finances are tied together in ways few Americans appreciate. JPMorgan Chase lost $2 billion earlier this month because of a rogue trader in London, and every time the Greek crisis has flared, the US stock market has fallen. Recently, the Organization for Economic Cooperation and Development cited Europe’s potential crisis as the leading threat to the global economy. America won’t escape the fallout.
Politics, like economics, has its rational and irrational side. It is irrational to let Greece ruin the world economy; it is rational for money to flow away from weak countries, as will happen if the Euro begins to unravel.
An irrational world economy will have a rational political impact; people will get mad, and they will toss out their incumbent governments. That is occurring now in Europe; almost every election in the past two years has seen the incumbents booted; socialists ejected in Spain and Portugal for conservatives; conservatives defeated in France and Italy for socialists. If they had an election in Britain, Labor would come back in Conservatives would go out. In Greece, a country whose problems are the result of a bloated public sector and unsustainable pensions, the thrust has been to the far left. In other words, everyone who is in is being thrown out, as voters very purposefully vent their anger.
This is what happened in October 2008, the sudden banking collapse occurred on the Republicans’ watch, and whatever chance Sen. John McCain had to win that year disappeared in the bankruptcy uproar. So it could well be this November. President Obama is not to blame for Greek pensions, but the unraveling of the European financial system that would accompany a Greek default cannot help but be a body blow to the fragile American economic recovery.
In 2008, the collapse occurred with little warning and there was nothing the Bush Administration could do to head off the public’s anger. This time the pending collapse is front and center for all to see, yet heading it off seems harder and harder.
That may explain the Obama Administration’s frantic efforts to define GOP nominee Mitt Romney as an unacceptable alternative whose hands are soiled by the same misdeeds that has caused all this financial misery.
This is, however, a difficult sell if Europe’s finances push the world, and America, back into recession. It is not Obama’s or Romney’s fault, but Obama is the one now holding the bag, and angry voters react bitterly when confronted by hardships they little understand. Often they throw out the people in charge even if they are not at fault.
In the year 2012, it may not be the Super PACs, or the massive fundraising, or the television talking heads that settles the election. It may well be a world economy held together by such fragile knitting that the removal of a single thread in far off southern Europe unravels the entire thing.