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Why the Eurozone spells trouble for U.S.

Turmoil in Greece threatens to derail economic recovery, upend November elections

By Jeff Benjamin

May 27, 2012 6:01 am ET 

As the question of Greece’s abandoning the eurozone increasingly shifts from “if” to “when,” speculation mounts about what impact a European crisis would have on the U.S. economy and the upcoming presidential election.

“In the U.S. right now, our economy is barely chugging along, and an economy moving at a subpar growth rate can handle very little in the way of shocks to the system,” said Lance Roberts, chief economist at StreetTalk Advisors, which manages $475 million in assets.

Translation: The ripple effects of the Greek debt crisis easily could reach the U.S. by the November elections, and a weak economy never bodes well for the incumbent.

Brian Gendreau, a market strategist at Cetera Financial Group Inc. and a professor of finance at the University of Florida, said, however, that it almost doesn’t matter how President Barack Obama reacts to the crisis overseas — unless it affects Americans directly.

“People vote with their pocketbooks, so it won’t matter how Obama responded to the crisis in Europe, because that’s too remote for most voters,” he said.

Rex Macey, chief investment officer of Wilmington Trust Investment Advisors, part of a $77 billion trust and advisory firm, argued that a European economic crisis can only hurt Mr. Obama.

“If the issue foremost on voters’ minds at the time of the election is the economy, and the world is looking worse and moving in the wrong direction, then the voters will favor the businessman over the community organizer,” he said. “But if the economy is looking good, people might be more focused on social issues like gay marriage.”

Even though a Greek departure from the eurozone isn’t expected within the next few weeks, it is considered inevitable by many, which is why the handicapping and preparation about what comes next already has started.

“If the U.S. economy … and the rest of the world were healthy, Greece [an economy about the size of Massachusetts] wouldn’t be a problem, but right now, it’s like a bunch of people with weakened immune systems being around someone with the flu,” Mr. Macey said.

“We are back to fears of a global slowdown,” he said.

Greek voters will go to the polls June 17 for a runoff election to determine a majority party in parliament, following a May 6 vote that left the legislature split over how to deal with austerity measures connected to a $160 billion bailout package.

Although most economists and market watchers concur that swift and severe austerity is the best course of action for Greece, the smart money is on voters’ favoring something that resembles more government social support, not less.


“The population in Greece is certainly not clamoring to leave the euro, but they are clamoring against the austerity measures, which means they want it both ways,” said Fran Rodilosso, manager of credit portfolios at Market Vectors, a unit of Van Eck Global.

“I think there are incentives for Greece not leaving the euro, but on the other side, it’s getting more expensive to keep them in,” Mr. Rodilosso said.

The challenges following a Greek exit from the euro could be extensive.

“Two of the biggest problems with [a Greek exit] are that the eurozone wasn’t designed to allow any country to exit, nor is there a precedent for such action,” said Jon Short, managing director and head of global wealth management at Pacific Investment Management Co. LLC.

“A Greek exit will be expensive and messy, and the uncertainty in Europe will probably linger for some time,” he said. “From a U.S. perspective, that will probably lead to the continued flight to quality you see reflected in a 10-year Treasury yield well under 2%, even though the U.S. economy has its own considerable structural challenges, including a good dose of its own policy and political confusion.”

The contagion effect of a Greek exit includes concerns that similarly debt-laden countries such as Italy and Spain, with much larger economies than Greece’s, will follow suit. And the potential consequences could be a wake-up call for a debt-burdened country such as the United States.

“We will be facing the same issues here in the United States starting in 2013,” Mr. Macey said in reference to the year-end “fiscal cliff” that will combine higher tax rates, reduced unemployment benefits, spending cuts, the end of a payroll tax cut and the start of new taxes enacted as part of the health care reform law.

“If Congress does nothing, we will have austerity thrust upon us, and that fiscal cliff will either be recessionary or will contract the economy,” he said.


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