Somewhere in Toledo there is a middle-class family that holds Barack Obama’s political fate in its hands. Toledo, Spain, that is. Europe’s common currency is vaporizing fast along its southern periphery just months before the U.S. election, and the reactions of everyday Europeans to their predicament could determine the next U.S. President.
The last big corporations willing to park their money overnight in Spain, Greece and Italy pulled out a year ago. Six months after that, the last big private investors fled with their cash. Now the shaky banking systems of those countries survive thanks largely to everyday depositors keeping the faith that their life savings won’t suddenly be transformed from German-backed euros into pesetas, drachmas or lire or be wiped out completely in a national bank failure. A bank run that starts in Spain won’t end there. It could destroy remaining confidence in debt-laden countries, break the euro zone and send shock waves through economies from America to Asia.
That could be fatal for Obama’s re-election hopes, and there’s not much he can do to stop the chain reaction. In theory, Obama could throw American economic might into the fight by publicly embracing a forceful intervention by the International Monetary Fund. He could also urge the U.S. Federal Reserve to support its European counterpart by swapping dollars for euros to prop up the euro if a fiscal mushroom cloud goes up over Madrid or Rome. In exchange for some international cover, Germany and other rich euro-zone nations might accept closer political and financial partnerships with the poorer countries along the Mediterranean. But bailing out Europe via the Fed or worse, via an international institution, would be political suicide in an election year. November is already shaping up to be about the proper role of government in the U.S. economic recovery. You can almost hear the GOP crafting the ads that would result if Obama were to get fully behind a U.S.-led bailout of Europe, even if the U.S. were to benefit. And yet if Europe swoons and takes the weak American recovery with it, Republicans will say Obama should have done more. It’s a tailor-made trap on the biggest issue of the election.
So Obama is left with badgering Europe to fix itself while hoping the bottom doesn’t fall out. He has dispatched Under Secretary of the Treasury Lael Brainard with a long list of things the Europeans should do, from streamlining its emergency bailout fund to easing off austerity demands on the staggering southerners. At a June 8 press conference, he called on Europe to take “specific steps right now to prevent the situation from getting worse.” The approach is heavy on talk and light on action. At the G-20 summit in Mexico on June 18, the U.S. sat on its hands while emerging-market countries bolstered the funds available to the IMF, which doesn’t have nearly enough money to bail out Europe. Frustrated IMF officials complain that Obama and his team aren’t even leading from behind.
It’s true that only Europe can preserve its currency. IMF chief Christine Lagarde has some prescriptions for the continent’s ills. For starters, Europe needs the equivalent of FDIC insurance for depositors. A euro-zone-wide system that reassures small depositors will make any panic-driven bank runs less likely. Second, Europe needs one organization with the authority to unwind insolvent banks, also like the FDIC, which has quietly taken over 450 small U.S. banks since the financial crisis began in 2007. But those steps can work only if Europe achieves true financial union, including one body to monitor and regulate banks to keep them from becoming insolvent in the first place.
Eventually Europe, and Germany in particular, needs to embrace the kind of tighter political union that has allowed the U.S. to shift resources from its rich states to its poor ones in service of common economic growth. That requires a level of faith that is diminishing by the hour. Though average Europeans may still believe they belong to a currency union, the euro zone has already effectively ceased to exist as banks have stopped lending to one another and the single euro market has fragmented. European leaders who will meet June 28 in Brussels know that Lagarde’s therapies must be adopted. But if all they do is talk, watch out: middle-class savers in Spain, Greece and Italy may yank their deposits, casting a vote against the euro and the U.S. President on fear, not faith.