GOP needles on Europe, but US needs Europe rebound

January 14, 2012 - 9:00 AM
Germany Europe Financial Crisis

German Chancellor Angela Merkel, attends a press conference in Kiel, northern Germany, Saturday Jan. 14, 2012 after a meeting with Christian Democratic (CDU) party leaders. German Chancellor Angela Merkel says Standard & Poor's downgrades of nine eurozone countries underline the fact that Europe has a "long road" in front of it to win back investors' confidence. Merkel pushed Saturday for European countries to implement "as soon as possible" a planned pact to strengthen budget discipline and said eurozone countries also must move quickly to implement their permanent rescue fund - the so-called European Stability Mechanism. (AP Photo/dapd: Philipp Guelland)

WASHINGTON (AP) — Iowa and New Hampshire have had their say. Next up are South Carolina and Florida, with Germany and France lurking in the background.

What happens across the Atlantic with Europe's troubled economies could rain down political thunderclaps across the United States. If Europe tanks, it could take the fragile American economy with it, undermining President Barack Obama's re-election hopes and giving Republicans more opportunity to attack him.

The outcome of U.S. elections may depend in part on the ability of German Chancellor Angela Merkel and French President Nicolas Sarkozy, leaders of the continent's two biggest economies, to find a long-term fix for Europe's debt woes.

Despite some progress, European politicians haven't found a way to stop the economic misery from infecting other nations that share the euro as their currency. They will try again at a European Union summit Jan. 30.

If they succeed, it could give a boost to the U.S. economy, given that 27 percent of all U.S. exports now go to Europe, and to Obama's chances for a second term. His re-election prospects have always been tied closely tied to the health of the economy.

Should the Europeans fail, it could hurt trade, consumer confidence and possibly even shatter the euro, gumming up much of the world's banking system in the process.

In the U.S., that would play into GOP criticism of Obama's economic stewardship and fuel Republican assertions that the president wants to make America, well, more like Europe.

That is the central message of presidential candidate Mitt Romney, who has won the Iowa GOP caucuses and the New Hampshire primary. The GOP front-runner emphasizes his business background and his four years as governor of Massachusetts to promote his claim that he can create jobs.

The U.S. outlook is improving, helped by the creation of 200,000 jobs in December that dropped the jobless rate to 8.5 percent. Some 1.5 million jobs have been added in the past year and the pace seems to be quickening. Manufacturing and consumer spending are looking up and housing markets may have bottomed.

Yet the full brunt of Europe's debt crisis has not been felt. Up ahead: an expected further tightening of credit and a retrenchment by European banks. Austerity measures along with a bank pullback could prove to be a huge drag on growth in Europe and the United States.

"Time would suggest the crisis is deepening," said Heather Conley, a Europe expert at the Center for Strategic and International Studies. "The Obama administration is very concerned about, in its view, Europe's lack of ability to get hold of this problem and handle it decisively."

"Our economies are so interlinked and intertwined that whatever happens in Europe has a significant impact in the United States, and whatever happens in the United States directly affects Europe," Conley said.

A failure by Europe to get its economic house in order could bring "told-you-so" taunts from Republicans, who claim Obama is steering the U.S. on a course toward European "socialism."

"He wants to turn America into a European-style entitlement society," Romney said after his New Hampshire victory. "This president takes his inspiration from the capitals of Europe; we look to the cities and small towns of America."

Republicans mostly blame Europe's woes on stubborn labor unions, confiscatory tax rates, workforce rules that have diminished productivity, and national budgets strained by generous pension promises and free health care.

Former House Speaker Newt Gingrich manages to zing both Obama and Romney, calling Romney a "Massachusetts moderate" who, like Obama, gets his ideas from "European socialists."

Much depends on the German and French leaders. After sparring at first, Merkel and Sarkozy reached an uneasy peace last month, uniting behind a fiscal discipline plan that handed sweeping oversight powers to EU budget specialists in Brussels. That produced some brief optimism.

Still, all know it will be a long haul ahead, dramatically underscored by Standard and Poor's downgrade Friday of the credit ratings of France, Italy, Austria, Spain, Portugal and several other eurozone countries. Downgrades make it even harder for burdened countries to trim debt.

And there's the possibility that the German-French teamwork could falter.

Sarkozy is trailing in polls heading toward a two-round presidential balloting on April 22 and May 6. The front-runner, Socialist Francois Hollande, has denounced the Sarkozy-Merkel plan now in place and has hinted he would walk away from it if elected.

Merkel, too, is struggling to hold together her coalition.

Merkel and Sarkozy also have differences over what role the European Central Bank should play and on a time schedule for introducing a tax on financial transactions in the 17 eurozone countries.

Without the German-French partnership, the region could descend into turmoil. Many economists doubt the euro could survive under such circumstances.

"It's certainly possible" that a sharp worsening of the crisis could derail the U.S. recovery, said Nariman Behravest, chief economist at IHS Global Insight in Lexington, Mass. "The most likely scenario is Europe will sort of muddle through. But if there is a financial meltdown in Europe, then yes, it could drag down the U.S., both in terms of the stock market and the economy." He puts the odds at "maybe 20 to 25 percent."

"I think Mr. Obama has more to worry about because if things go really badly, it will hurt his re-election chances. I'm not sure about the Republican contenders. A lot will depend on what they say and how they say it," he said.

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