04/24/2012 05:03 pm ET

In 2012 Election, Europe's Growing Economic Woes Loom Over Race For White House

WASHINGTON -- The economic situation in Europe -- which many observers believe will have a significant impact on whether President Obama will be reelected -- is increasingly grim.

Spain, Italy and Greece are struggling anew. The Dutch government collapsed Monday after they were unable to agree on an austerity package. Financial markets are closely watching the French presidential elections, anxious that if Socialist candidate Francois Hollande unseats President Nicolas Sarkozy on May 6, he will follow through on promises to increase federal spending despite a massive public debt and will seek to reduce deficits with huge tax increases on the wealthiest taxpayers.

And voters across the eurozone are angry about the lack of economic growth, despite cuts to government benefits and jobs.

To the extent that Europe's troubles continue to mount, that will likely increase the drag on the U.S. economy. The worst-case scenario would be a collapse of the eurozone, with one or more countries withdrawing from the alliance and broad economic disruption.

"Europe is in a mess. There's no question about it. The only question is how much of it will spill over to us and how quickly," said Doug Holtz-Eakin, president of the American Action Forum.

Holtz-Eakin, who was an adviser on the 2008 presidential campaign of Sen. John McCain (R-Ariz.), said he thinks the center will hold -- for now, anyway.

"They've thrown tons and tons of resources at the Greeks, the Italians and the Spaniards just for that purpose. It's not obvious that they're going to succeed but it looks like they've bought time to get through the elections," Holtz-Eakin said.

Jared Bernstein, who was Vice President Joe Biden's top economic adviser in the White House until he left the administration last year, also said he thinks Europe is a nuisance to the U.S. economy and political environment, but not a crisis.

"I think it's gonna shave something off our [Gross Domestic Product] growth but probably a fractional amount. That's already baked into the forecast that I and I think others are making," Bernstein said.

Holtz-Eakin said he thinks the U.S. economy will trend downward before November, but not necessarily because of Europe's travails.

"I think markets will be equally concerned about the ability of Democrats and Republicans to avoid the fiscal cliff at the end of this year," he said, referring to a number of taxes set to go up and spending on schedule to be cut at the beginning of 2013.

"I actually expect markets to go south before the election, as markets look at the back and forth on the campaign trail, how it's spilled over into Congress, and the list of things that have to get done during the lame duck, they're going to get progressively more pessimistic about the capacity of the U.S. to take care of its problems," Holtz-Eakin said.

There is also concern that in the wake of an agreement between federal and state officials and five of the nation's largest banks over an investigation into foreclosure abuse, the banks may move forward once again to act against homeowners who are not paying their mortgages. That too could increase economic pain in the months leading up to the presidential election in November.

The election is a showdown between Obama, a Democrat, and his Republican rival, former Massachusetts Gov. Mitt Romney. Obama has higher personal favorability ratings, yet Romney gets better marks from voters on his ability to turn the economy around. If the economy remains steady and improves slightly, Obama will hold an edge with many voters. But if economic woes persist or become worse, that could tilt the field in Romney's favor. And Europe and the housing market are just two of a few significant factors that could shape the election.