The 2012 Presidential Election Is Going To Be Decided By Europe

Public debt as % of GDP in countries using the Euro. Source: CIA World Factbook

If you want to make God laugh, make a plan. Or an election prediction. Knowing full well that I'll likely be completely wrong, I'm going to make a bold electoral prediction: the winner of next years presidential race is going to be decided by the big issue none of the candidates are talking about. And that issue is what happens in Europe.

There are two reasons no one is talking about it. First, it's extremely complicated. From what I can gather, multiple European countries, including Greece, Italy, Ireland, Spain, and Portugal are wallowing in debt. The danger comes from all the people and institutions that are now connected to that debt via 'credit default swaps'. These nasty little insurance policies are essentially bets that a certain debt won't default. They're also the same financial gimmick that led to the 2008 financial crisis. You can think of Italy as Lehman Brothers, but much, much bigger. If one of these countries throws their hands up in the air and says 'I can't pay off this debt, I'm bankrupt', then all the credit default swaps attached to that countries debt are supposed to be paid off. The problem? There isn't enough money in the banks that sold the credit default swaps to do that for a country like Italy. So Banks collapse, pensions and retirement funds disappear, and stock markets plunge. Again, like 2008, but much, much worse.

Secondly, there isn't a whole lot we can do about it. Right now the wealthier European countries are debating how much money they need to put up in order to bail out countries like Greece. That's hardly a popular notion in those countries, so just try to imagine an American politician saying we need to help bail out Italy.

What this means is the 2012 presidential election is in the hands of the European Union. If they can minimize and contain their fiscal crisis through bailouts and austerity and prevent any member countries from defaulting, Obama stands a good chance of being re-elected based purely on the incumbent advantage (and so long as nothing else hurts the economy). But what if the EU can't get its act together and a member country defaults, or worse, leaves the Euro? The global economy tanks, perhaps worse than it did in 2008 (and keep in mind, the economy before the 2008 crisis was doing a lot better than ours is now). Try as he might, Obama won't be able to explain another worse recession as 'Europe's fault'. At that point, Mitt Romeny would be a shoe in, and a Michelle Bachmann or Herman Cain could probably narrowly defeat him.