Economic turmoil in Europe could be key that turns U.S. elections

The Takeaway

Mitt Romney and President Barack Obama may find themselves watching events unfold in Europe with a little uneasiness.

After all, Europe’s political calendar may create the perfect economic storm, one that could blow across the Atlantic and decide who wins election in November to the next four-year term as President of the United States.

François Hollande is being inaugurated today after French voters rebuked incumbent Nicholas Sarkozy and his emphasis on austerity. Even German Chancellor Angela Merkel’s party was dealt a stinging rebuke by voters over the weekend.

But all of this pales in comparison to the debacle Greek voters are facing. With no indication that a government can be formed based on the returns for this month’s elections, the country is looking at calling new elections for June. The government, whenever its elected, will be expected to decide whether to stick to their promise of austerity or give it up, which will likely lead to loss of European bailout funds, loan default and ultimately, expulsion from the euro zone.

The ramifications of that decision might also extend all the way to the White House and present a nightmare for President Obama.

Justin Vaisse, senior fellow on foreign policy at the Brookings Institution, explains that two different scenarios could both influence the November elections. For example, new figures out Tuesdays showed that while 11 European countries are already in recession, the euro zone itself managed a zero percent growth rate. Not good, but not recession. If Europe as a whole descends into recession, it could be trouble for the U.S. economy and, consequently, for Obama.

“More (nations) could join (the recession), especially if François Hollande and Angela Merkel don’t find a way to stimulate growth in the next few weeks,” Vaisse said. “A stronger recession in Europe would contaminate the U.S. economy by virtue of the very strong investment and trade links between the two sides of the Atlantic.”

Vaisse points out that while the elections in France and Germany have been billed as a rebuke of austerity, neither country has really seen significant austerity measures of any kind. It’s more like fear of austerity measures, he said.

“For the U.S., the message to some extent is that austerity should not be pushed too far,” Vaisse said. “However, there’s also danger … of sounding like a French socialist. I can see, right now, the spot on TV that Mitt Romney would run against Barack Obama, saying ‘Obama is rejecting austerity. He’s adopting the policies of European socialists.’ That would be bad.”

So it cuts both ways, Vaisse said.

The other scenario that could negatively impact the United States is if Greece continues to fail to form a government, Vaisse said. If that happens, the country won’t be able to follow through on its budget cut promises, would lose the European bailout funds and would default. That could be a major shock to the global economy.

“Greece is a very strong country in terms of economy, it’s 1.5 percent of the total euro zone. It doesn’t look like a big deal,” Vaisse said. “But it actually a big deal because we don’t know if ever Greece leaves the euro, which is now not the most certain solution but may happen, we don’t know if it will be an orderly exit, or a messy exit with Greece just stopping paying.”

A messy exit could poison economies across the euro zone, which could spread to the United States. Vaisse compared the impact of that to the fall of Lehman Brothers in the United States when the Great Recession started in 2008.

Vaisse said that could also pose a problem for Obama because even if the shock is small and short-lived, the timing would be such that it makes the U.S. economy right when the incumbent president needs the economy to be improving.

“It might effect the world economy and the especially the U.S. economy in August and September and October. That’s the months that political scientists tell us really count in terms of making electoral choices for a large part, or a swing part, of the election,” Vaisse said.

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