Posted on 05/25/2012 1:15:21 AM PDT by neverdem
Europe’s Greek tragedy has now entered its final act, with potentially fateful consequences for the global economy—and for Barack Obama, whose reelection may hinge on the decisions of Germany in the coming weeks. The 2012 election will pivot on the public’s evaluation of the president’s economic stewardship, and a perceptible decline in the U.S. growth rate—which a badly handled Greek exit from the Eurozone would cause—could easily spell the difference between victory and defeat. Obama’s fate, then, may well lie in Angela Merkel’s hands. That doesn’t mean, though, that there’s nothing he can do about it.
What are the economic stakes? Mark Cliffe, ING’s head of Financial Markets Research, has conducted the most detailed analysis that I know of. He examines two scenarios—a Greek exit from a Eurozone that remains intact, and an exit that triggers a complete collapse of the European monetary union. The consequences of the latter would be catastrophic. In the first year alone, Eurozone GDP would fall by 9 percent. Inflation in the “peripheral economies” such as Spain and Portugal would head toward double digits, while the Eurozone core—especially Germany—would suffer a “deflationary shock.” Because the dollar would surge in relation to whatever national currencies might emerge, the United States would undergo that shock as well, and the exchange-rate jolt to U.S. competitiveness would reduce the odds of a sustained recovery in U.S. exports—a cornerstone of Obama’s growth strategy.
The consequences of a Greek exit considered in isolation would be less serious, of course. Even so, they are not pretty. Cliffe projects that the Eurozone would undergo a major recession and experience significantly higher levels of unemployment. In the United States, GDP growth would slow to only 1.3 percent in 2012 and 1.7 percent in 2013. Unemployment would stop falling and stagnate at current levels for the remainder of this year. These developments would make it harder for Obama to argue that we’re heading in the right direction, and—based on my analysis of recent elections involving incumbents—I suspect that economic growth at these depressed levels would mean victory for Mitt Romney.
From the American standpoint, the best outcome is concerted European action to keep Greece within the fold, while the second best outcome is a strategy that delays the inevitable until Europe can strengthen its defenses against contagion.
But there’s a problem: Many key European officials and observers have concluded that a Greek exit is both inevitable and manageable. A lengthy article in Der Spiegel makes this case, going so far as to argue that the consequences of doing what would be necessary to keep Greece in the monetary union would be worse than allowing it to leave. And Germany’s powerful Bundesbank agrees. Its most recent monthly report states: “A significant dilution of existing agreements [concerning Greece] would damage confidence in all euro area agreements and treaties and strongly weaken incentives for national reform.” Crucially, Germany’s central bank has concluded that Europe could successful deal with a Greek exit: “The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.”
To be sure, many other leaders—especially in France and Italy—are far more concerned about Europe’s ability to contain the consequences of Greece’s departure. France’s new president, Francois Hollande, is pushing the European Central Bank to provide further liquidity and intervene in sovereign debt markets. But the stark fact is that right now these leaders’ views don’t matter all that much. Angela Merkel, Germany’s new iron chancellor, holds the veto, and she appears unyielding. And (it must be said) German opinion from top to bottom seems driven by the tale of the ant and the grasshopper. Germany’s success in no accident, Germans believe. A thrifty, disciplined people bit the bullet and made the painful structural adjustments that long-term prosperity requires. Now it’s time for others to follow suit.
Until now, the ability of the United States to influence Eurozone policy has been modest, and many of our efforts to do so have produced resentment. So what is President Obama to do? If he believes, as I think he should, that the global economy, U.S. economy, and his own electoral prospects all hang in the balance, then he should call Merkel and propose a quick summit between the two leaders and their respective economic teams. He should come armed with a menu of concrete steps that the United States and major international institutions would be willing to take if Germany were to change course. He should appeal to Germany’s self-interest as the major beneficiary of the expanded export market the Eurozone has created. He should remind Merkel of the sacrifices that the United States made over many decades to help build a Europe that is free, whole, and united. And he should make it clear in private, and announce in public, that from the American standpoint, what touches all concerns all: Chancellor Merkel is not free to proceed as though the current crisis affects only Germany (or Europe) and the rest of the world has no legitimate say in the outcome.
Granted, this would be a bold and risky step. There’s no guarantee of success, and it would surely strain ties between the United States and one of its most important allies. Obama could return empty-handed, resulting in a diplomatic catastrophe. But the alternative is worse—to stand by while the dominant European country allows short-term politics, nationalist myopia, and misplaced moralism to substitute for far-sighted statesmanship that promotes a broader good.
William Galston is a senior fellow at the Brookings Institution an a contributing editor for The New Republic.
Merkel and Greece will have offers from Russia and China, Zero will have to bid more and it won't be with goodwill, ironically, that's now worth zero.
Negotiating with the Greeks is like negotiating with the Democrats on the basis of tax increases now in return for promised spending cuts later. How many times do you have to be burned before you wise up to the fact that the other guys are just playing you for a chump?
Can someone explain how the failure of a $300 billion dollar economy can destroy the world? What does Greece supply the world that the world needs so badly?
The way this works....Greece fails and goes back to the Drachma. During this four-week phase (one would imagine various details have to worked out)...the Euro would grow weaker against the dollar.
Three years ago...it took around 1.33 Dollars to buy one Euro. So today...the exchange is around 1.25 Dollars to the one Euro. If you walked into Europe and bought a company or bought stock in 2007....you would have lost ten percent so far in your value since this change started.
So lets imagine November rolling around and Greece is totally on its own, with the Euro now sitting at 1.15 Dollars to the Euro. You would have lost more in the process of viewing this mess.
Greece is merely one of the bad economies in Euro. I know the CNN and ABC guys hadn’t ever mentioned this....but Spain, Portugal, Ireland and Italy are also in pitiful states. Once you start this Euro trend, where does it end? You don’t know. But with the 1.15 exchange rate....everything European is cheaper for us to buy, and much more expensive for Europeans to buy American products.
We might see, by early 2013, some exchange of 1.05 dollars to buy one Euro. A massive loss in investments would have occurred, and a massive loss in purchasing of American products. Meanwhile, Americans would be buying a heck of a lot of European products.
Greece is merely the trigger to this event. As for Obama? The only thing he could do out of this...is encourage Germany to loan the cash to Greece without any reservations. German public sentiment is that Greece has to agree to austerity and Greek political folks have to sign their name to the deal. I don’t think that will happen.
The last observation I can make....maybe Obama doesn’t want Greece to easily survive this mess...that a bad economic turn is the eventual goal of the administration anyway.
Greece is the emperor’s assistant and is also wearing no clothes but since they are only the assistant, people are more willing to point it out.
ZERO can sink it all by himself. No help needed. . . . .
Obama is being ignored in Europe (especially Germany) as a failure & loser. His economic prescriptions are folly. Merkel will nod & smile in any emergency meeting with Obama, just as one does to a madman.
Certainly, a Greek exit of the Euro will be disruptive to the US economy, but that is a fly on an elephant compared to the damage Obama does, every day!
Curious reasonin from the New Republic. The socialist states in Europe are in collapse from the weight of their own largess. At home our socialist POTUS is in danger of being exposed as having set us on the same path.
Solution? Find a way, any way, to kick the can just a little farther down the road.
Because everyone has thrown so much good money after bad on Greece. Essentially, they have continued to double down on a bad hand, telling their citizens that nothing is lost as long as the pot is still on the table.
Now the hand is over. Spain won't be far behind.
Spain has economic potential. Greece does not.
I’m not sure why you think Spain will overcome the socialist mess they’ve created.
Spain has always been stronger than Greece, but its still going down....and so are we.
It is amazing, given its small population, impossible terrain, lack of industry, and mediocre farming, that Greece has any economy at all!
Of course, the citizens of both Spain and Greece want to live luxuriously as the Scandinavians! Who wouldn't? But that takes physical and mental infrastructure and money, honey!
The kenyan’s electoral fate is in the hands of two men named Pelosi and Soros. Pelosi owns the company that made all the voting machines. Soros owns at least part of the company that will count the votes and that counting will be in Spain. There will be NO record of the votes once they are counted. The only record will be the announced count.
The outside world has a limited demand for ouzo, feta, and retsina.
Ireland used the money quite wisely and had quite a really solid development boom going on, attracting lots of new industry, doing lots of building, etc. Of course, now that bubble has burst. But the country IS probably better off than it was pre-Euro. (At least I can tell you the food's better!)
Portugal, about which I know nothing except that it is in grievous trouble, is also said to have been, albeit briefly, a bit better off. Worse case scenario: generally acknowledged to be Greece. Greece is noted for having just about totally mis-spent their big slice of the Euro-Aid. They started some super-highways and the rest went down some corrupto-hole and to government employee pension schemes ... nothing to show for the enormous investment.
One other thing Ireland does a bit better than the others: it has firmer control over immigration ... it says. Greece, as tragically messed-up as it is, is a magnet for illegal aliens from everywhere. Nothing like saddling a dead-broke operation with more mouths to feed on the dole.
And, yes. Obama is hoping for a massive collapse so that he can declare elections too dangerous and impose martial law. It's what Alinsky has been hoping for to "bring down capitalism".
B of A, Wells Fargo, Chase, and Citi Bank all have enough credit extended to Greece to put all of them under if Greece fails.
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>> “It is amazing, given its small population, impossible terrain, lack of industry, and mediocre farming, that Greece has any economy at all!” <<
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The Greek economy is 95% tourism. Current social conditions in Greece are rapidly sinking the tourism boat.
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