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.