Forget Mitt Romney or Rick Perry. Forget Occupy Wall Street, a government shutdown, a credit rating downgrade or even the Tea Party. The biggest threat to President Obama’s re-election is Europe. Quite simply, Europe controls the fate of the global economy. As Obama himself said at his press conference last week: “The biggest headwind the American economy is facing right now is uncertainty about Europe, because it’s affecting global markets.”
First the nightmare scenario. If everything goes wrong, this is what could happen: Greece defaults. Sure, most folks expect Greece to pay back some of its debts – some 50% could be avoided through a bondholder “haircut” if today’s Der Spiegel is to be believed. But while unlikely, the Greek government could abruptly decide to simply choose not to pay back anything. Rumors fly daily through European markets that Greece is on the cusp of a coup and the new right-wing government would do exactly that. Why would this be bad? It could cascade through highly-exposed European banks–not to mention indebted European nations such as Italy, Spain and Portugal–triggering a continent-wide financial crisis. It’s difficult to say how exposed U.S. banks would be to such a crisis, or if the federal government would again bailout its biggest financial institutions, effectively detonating a political nuclear bomb in the middle of the election season and what could be another recession. Game over, Obama.
This is just the worst-case scenario though. The breadth of the crisis will largely depend on how much confidence German Chancellor Angela Merkel and French President Nicholas Sarkozy can inspire before Greece runs out of money in mid-November. Markets tanked this summer when Germany didn’t put enough money into the European Financial Stability Fund – only $600 billion, not nearly enough to plug Greece’s gaping debt hole. That said, markets were buoyed today when Merkel and Sarkozy pledged to recapitalize European banks, though they provided few specifics on how they actually plan to achieve this and action from Europe’s 20 unwieldy parliaments often makes molasses rolling uphill in June look fast.
Analysts say the next month will be pivotal in reassuring global doubts that Europe can handle its debt, but even if confidence is reestablished, there aren’t many scenarios in which Europe – and the world economy – makes it through the next year unscathed. So, in pretty much every scenario, Obama’s reelection chances will be weakened by the Eurozone crisis. “They’ve got to act fast,” Obama said of European leaders last week. His job, among millions of others, likely hangs in the balance.