Forget the potential for an unpleasant October surprise emanating in Iran, Afghanistan, Israel, Pakistan or North Korea. The biggest threat to Barack Obama's re-election is the economic folly of our good friends in the European Union, who seem determined to snuff our their economic recovery -- and ours.
America's own recovery is making very fragile progress. We don't know whether the economy will keep generating jobs well in excess of 200,000 a month, as in January and February, or only a bit more than 100,000 a month as in March. But we do know that exports have been one of our economy's surprising sources of strength, and that Europe is one of America's biggest customers.
But Europe is even more committed to austerity economics than the United States, and as a result Europe is right on the edge of a double-dip recession.
If the American recovery slows even slightly, unemployment could start creeping back up. It is hard to imagine an incumbent president winning re-election with joblessness in excess of eight percent and rising.
The following key differences between austerity politics in the U.S. and the E.U. are worth noting.
First, we have a real central bank, the Federal Reserve. Whatever the Fed's other sins, it is usefully keeping interest rates very low and buying government and other securities as necessary. Consumer debt service expenses, for instance, are falling -- primarily because of record low interest rates. This is good for the recovery.
The European Central Bank (ECB), by contrast, is explicitly prohibited from buying the bonds of EU member governments. With private financial markets speculating against the sovereign bonds of several European countries, the ECB can only help prop up sovereign bonds indirectly. The ECB makes cheap credit available to Europe's banks and the banks in turn buy sovereign bonds.
Since Mario Draghi took over last fall as ECB president, the bank put up about a trillion euros in cheap loans to Europe's banks. The banks have invested most of that money in European government bonds.
But that leaves real enterprises struggling to get bank credit; and as hedge funds bet against sovereign bonds, the banks with their large bond holdings risk losing a lot of money. After several weeks of interest rates on government bonds falling for Italy, Spain, and Portugal, rates are rising again, signaling a new stage of the sovereign debt crisis.
Second, in the fiscal ring of the European circus, the Germans continue to be unrelenting in their refusal to European-ize the debts of smaller nations. Instead, pressure continues on nations such as Spain and Italy to reassure private markets by pursuing stringent austerity.
It should be clear by now from the Greek experience that this strategy backfires. The latest case in point is Spain. The new Spanish conservative government is dutifully cutting Spain's budget. This only reduces the projected growth rate, widens the projected deficit, spooks money markets, and increases the interest costs Spain has to pay to finance its debt. Spain chases its tail, and chases the economy downward.
Deflating your way to prosperity is a fool's errand. It depresses the real economy, and there is no reward from the speculators of the private money markets no matter how much austerity you pursue.
At last week's meetings of the International Monetary Fund and the World Bank, IMF director-general Christine Lagarde cobbled together pledges totaling about $430 billion to help Europe contain its debt crisis. But the European Central Bank and the German government under Angela Merkel insist coupling the support for the debt of member countries with even more budgetary austerity.
This policy is simply insane. Even Germany, with its large export surplus and low unemployment rate of 6.7 percent, will suffer if the rest of Europe keeps sinking into recession.
Should Socialist Francois Hollande be elected president of France in the runoff election on May 6, that will help create an antidote to the austerity politics that are dominating Europe. It will break the Franco-German conservative axis known as Merkozy. But France is just one country, albeit one of Europe's most important ones. And France alone can't dislodge Europe from the austerity path. Indeed, if France pursues growth while the rest of Europe sticks to austerity, that will just widen France's trade deficit and invite speculation against French government bonds.
A left government in Berlin would help, but the German elections are more than a year away.
In the U.S., at least, Fed Chairman Ben Bernanke has discarded his predecessor Alan Greenspan's notion that the price of a sensible monetary policy is fiscal austerity. The Fed is providing easy money because Bernanke knows that the economy needs it, not because Congress is embracing any of several austerity plans.
And although President Obama is under severe pressure to pursue an austerity policy -- from the Republicans, from too many commentators, and from Democratic deficit-hawks such as Senate Budget Committee Chairman Kent Conrad -- Obama for now is stressing recovery and growth first.
Last week at the spring meetings of the Fund and the Bank, however, Treasury Secretary Tim Geithner declined to commit a penny of U.S. support to the I.M.F's new war chest to help Europe.
American leverage over Europe is admittedly limited, but some additional aid would have been a nice neighborly gesture. If Europe's misguided belt-tightening policies lead Europe back into recession, Europe could easily drag the U.S. recovery down with it.
Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.