America’s presidents live and die by the economy, and 2012 will be no different. Right now the delicate recovery that the US is experiencing could still be susceptible to major jolts to the world economic system. Far from America’s coasts and Washington DC, Greece, the tadpole of democracy, may very well be that jolt.
Still the bad boy after all these years
Greece should never have been let into the euro in the first place, and later discoveries proved this by revealing that the Greeks had tatzikied their financials. Now the euro zone is paying for their mistake, and imbalances are becoming larger everyday in a system where they should be coming together. Today Greece looks unable to endure the pain necessary to stay in the currency union.
What happens with Greece matters to America for a number of potential reasons, but mostly because unlike the past year of EU beaureacratic procrastination, something will happen long enough before the US election in November to already start to be felt domestically when voters go to the polls. But will the effect be positive or negative?
There are two main outcomes, Greece gets backed by Eurobonds to stay in the euro or Greece drops out and back to the drachma, their pre-euro cash. If Europe gets serious and backs Greece, investors will keep their money in euros and the EU can move beyond the crisis, probably seeing a slight bit of growth across the whole zone through the year. As a big readjustment is avoided, world leaders can keep their heads up for other problems, relieving a little pressure on Obama in world affairs.
If Greece drops out of the euro because it’s voters can’t handle the austerity and want their sovereign government to default — or because the rest of Europe says enough is enough — most countries in the remaining euro zone will see contractions in GDP over the next year. Investors move around money, the euro’s value rises killing exports, and it is a huge distraction politically while other weaker countries consider following suit.
There are two ways that this could affect America. The first scenario involves global banks and companies sustaining very large losses. Since so many of the largest companies in the world are global, this will pinch resources world wide. Overall it means a large drop in demand. If the effect is felt in the US in time for the election, it could propel Mitt Romney to the White House.
The second scenario involves a rush from European assets to American ones, as the dollar returns to being the global currency standard. The stability of the US would prove welcomed to weary investors who are betting on a few rough years in Europe. This could prove a boost to the American economy. It would not be permanent, and much of it would move back out once the old continent’s troubles even out, but the boost could come just in time for the first Tuesday in November. In which case, Obama would have the final piece to his reelection puzzle.