A serious Eurozone crisis is imminent. It will have serious,nasty ramifications for the U.S. economy and for Obama’s bid for reelection. Incumbent presidents generally get reelected when the economy is doing well. But a weak or faltering economy is bad news for incumbents because, rightly or not, incumbents get blamed for it. The US economy now is showing a few tentative signs of recovering. But if Greece leaves the Eurozone or Spain defaults or its big banks fail then the resulting carnage will impact the United States too. Unfortunately, both could happen.
Why it was just a few weeks ago that financial talking heads were saying how Eurozone problems were transitory or could be solved simply by pumping more money into faltering banks and countries. Of course, previous bailout money didn't help the banking system and weren't used to make loans to spur the economy. Instead it went right to the bond and debt holders, who often made these dicey loans knowing quite well they were reckless and imprudent. Now the populace of countries are being told they must man up,accept “austerity,” and pay for sins committed by others than themselves, even if it impoverishes them and their countries for decades. From such events, revolutions are born.
Iceland is the only country so far that did the sensible thing. They defaulted on their bonds, nationalized the banks, and arrested some of the bankers. Their economy is now recovering. By contrast, Greece is being forced to make payments they cannot possibly afford and which will crater what’s left of their economy. A Greek exit from the Eurozone is now a done deal. This means they will default. Reckless banks and hedge funds who continued to loan Greece money knowing the loans were risky, but who expected to bailed out by governments should trouble occur, will take severe hits.
Spain is a much bigger problem than Greece. Its real estate bubble and crash makes ours look mild by comparison. Its banks are on the verge of collapse and losses were pushed onto public balance sheets with predictably disastrous results. Other countries have similar problems. There is no entity on earth that can bailout Europe.
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The ECB has pumped in a trillion, with little effect. The US Federal Reserve and IMF couldn't if they wanted to because public opinion in the States wouldn't allow it. Germany and China don’t want to give more money, assuming they even could.
So, defaults will happen in Europe. Banks will fail too. Many of them will be sizable. The US banking system is inextricably linked to Europe so banks here will have severe problems. Liquidity will vanish because no one will know where the risk is. US exports will suffer. Our economy will probably head back into a nasty recession.
Romney will then blame Obama for the recession. Certainly some voters will believe him. But the truth is, there’s little Obama can do. The US doesn't have enough juice, power, or money to stave off disaster in Europe. But it will feel the effects. How Obama handles this may determine whether he gets reelected.