How Europe’s Crisis will Affect the November Election

Europe’s elections on Sunday May 6 produced the worst possible results: a socialist president in France and a completely fractured parliament in Greece. The situation is so bad, in fact, that according to Reuters

Banks are quietly readying themselves to start trading a new Greek currency.

As I reported the other day, the European Central Bank is so worried about Greece seceding from the euro that they felt it necessary to take a pre-emptive measure and declare that:

Greece cannot expect to have an agreement with the ECB if it wants to renegotiate its austerity program. ‘Greece must understand very clearly that there is no alternative to the current austerity program, if they want to remain a member of the euro zone’, [ECB Board member] Asmussen made clear.

By doing this the ECB came out looking like they were in control of the situation, which of course they are not. They have feared this for a long time, given that the Greek government almost matches U.S. Congress in spending borrowed money. In fact, just to show how deeply the banking industry has been in doubt of Greece’s ability to stay within the euro zone, Reuters again explains that:

Some banks never erased the drachma from their systems after Greece adopted the euro more than a decade ago and would be ready at the flick of a switch if its debt problems forced it to bring back national banknotes and coins. 

And since the anti-EU and especially anti-euro parties in Greece got more than 60 percent of the votes last week, a re-introduction of the drachma would lead to monetary turmoil in Greece. The same parties that want out of the European currency union also want an end to the austerity programs that the former Greek government had agreed to in cooperation with the ECB and the EU. These austerity programs were aimed at turning the tide on deficit spending and bringing government debt under control. If the anti-euro parties want to end austerity, they will have to produce an alternative plan for how to eliminate or at least reduce the deficit. 

Since they have promised not to cut any more government spending, and since they reasonably cannot raise taxes anywhere nearly to the extent needed to pay for current spending, the only option remaining is to “pay” for the deficit by printing money. At first this is not going to have any effect on inflation – the Greek economy is in a very deep recession and, as the U.S. economy proved over the past four years, you can expand money supply radically in a deep recession without triggering alarming inflation rates. However, there is a significant risk that the monetary solution to the debt problem will become a permanent solution to government spending. When that happens, Greece will be en route to hyperinflation.

Which, needless to say, is not a very good idea in a country where voters have already opened the doors for miscellaneous extremist political forces.

Regardless of whether Greece leaves the euro or stays in, the European crisis is going to affect America in more ways than one. The aftershocks of what has already happened will be felt in the presidential campaign and will face Obama and Romney with a new, major foreign policy challenge.

The roots of this challenge are in the Greek election, but it is not isolated to the struggling Mediterranean nation. The economic crisis is spreading throughout Europe, now also including the Netherlands and thereby one quarter of the euro zone.  There are no signs of a sobering-up among politicians or voters in Europe . Quite the contrary, as demonstrated by French and Greek voters. As a result, the crisis will deepen over the next few months and create a very uncomfortable uncertainty as to the future of the euro, the European economy – and as a result the U.S. economy. This comes on top of the challenge presented by weakening Asian economies:

Dismal data from China and India on Friday may signal a further weakening of the global recovery, undermining hopes the dynamic emerging economies of Asia can help prop up growth. China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. Investment and retail sales also slowed, though easing inflation offers leeway for fresh moves to boost growth. India’s industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment. Output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before. The anemic indicators suggest Asia’s ability to counter slowing growth in Europe may be limited. It also shows that the brief burst of vitality partly fueled by European stimulus late last year is likely wearing off.

It is worth remembering that we should always take Chinese growth numbers with a grain of salt. The country is still a commando economy in the sense that the central leaders in Beijing send out requests for strong economic growth to provincial leaders, who in turn have to report good news back in order to keep their careers on track. (At least China appears to have abandoned the practice instituted by Stalin to execute political leaders who did not report acceptable growth numbers.) This means that the news that will come out of China over the next six months to a year could turn out to be a lot worse than reported here.

With the Japanese economy also in a stall, the global economic outlook is clearly on the negative. The problem is that the European crisis is entirely self-inflicted, caused by excessive welfare state spending, and made worse by the depression-inducing policies that the EU and the ECB are forcing upon its member states.

But the crisis in Europe is more than just an economic problem to America. The immediate effect of a weakening euro – and as a result a stronger dollar – will be overshadowed by the fact that the crisis will call into question the very strength and solidity of the EU itself. The Union’s erstwhile purpose, back when it was known as the EEC, was to facilitate international trade and cooperation in Europe, but since then it has built ambitions to become a superpower with half-a-billion residents, its own president, cabinet, tax collection, spending and military. These ambitions ran into resistance from skeptical nation-level politicians and European voters weary of ever more aggressive and absurd EU regulations. To shove their superpower ideas down the throats of the people, the eurocrats and their political allies have devised a strategy to put in place a frighteningly powerful, non-elected leader of the entire European Union.

This is a sign of weakness in Europe, not strength. It would accelerate the already emerging trend of political totalitarianism and does, for that very reason, present America with an entirely new foreign-policy challenge. If the EU turns more totalitarian, and if some member states pull in a similar direction but by exiting the EU, and if more sensible nations such as Britain, Denmark and some East European countries pull in the opposite direction – then the future of the EU and Europe will quickly become genuinely uncertain.

It is impossible to say today just how much weaker the EU will become, but the mere prospects of a disintegration of the euro-zone and of countries seceding from the common currency opens up the prospect that some countries might leave the EU altogether. Not only would this deprive America of a strong ally on the global scene, but it could create new conflicts, tip international loyalties in a new direction and open for a resurrection of Russian influence in some parts of Europe.

How would Obama and Romney deal with such a situation?

To reinforce the challenge that a Europe in imbalance presents to America, consider the fact that totalitarian parties are now on the rebound in Europe. The Greek election has inspired both communists and Nazis in many other European countries, where they have thankfully been marginalized. Last Sunday marked the first time since the fall of the Berlin Wall more than 20 years ago that totalitarian parties surge to national prominence in an EU member state. With more than eight percent of the votes, the Greek communist party is now big enough to be a player in forming the next government. Closely behind the communists are the Nazis, with up to seven percent voter support, and another nationalist party, LAOS, with three percent.

Add to this the fact that the second biggest party, the radical leftist Siriza, has communist roots and we have a political scene where totalitarians, authoritarians and aggressive statists mingle with each other and look for opportunities to grow even bigger.

Other countries in Europe are having similar experiences. Most notable among them is the French Front National, whose leader placed a strong third in the first round of the presidential election. Some polls suggest she won among young, first-time voters. And, again, the EU itself is pushing for more political power and a bigger government with even less accountability to voters.

It is of course unlikely that totalitarianism will become a factor to be reckoned with in Europe, at least for now. But as any student of history can see, there are many disturbing parallels between Germany in 1930 and some countries in Europe in 2012. If the economic crisis can blow new life into communists and Nazis in Greece, it can do the same elsewhere. Spain, Portugal, Italy and even France are at risk.

The potential rise of totalitarianism in the EU suggests that America once again needs a president who is willing to fight the philosophical battle for freedom on the global stage. Like a Ronald Reagan, the next president may have to have guts to deliver his own “Tear down this wall” speech in a few years.

Is Obama the man to do that? A look at his foreign policy record raises grave concerns. He spent his entire first year in office marketing a blatant anti-Americanism around the world; he has demonstrated a very irresponsible level of weakness toward Russia, and he completely mishandled the so called Arab Spring. It is unimaginable that he would know how to handle a troubled Europe.

Just like in 1980, America today, and the world, needs a man in the White House with the love for freedom of a Ronald Reagan, the backbone of a George W Bush and the courage of a Dick Cheney.