How the Euro Crisis Could Sink the Obama Campaign

The busy shop floor at Miller Weldmaster Corp could make a great location for an Obama campaign ad.

As workers assemble the family-owned company’s hot-air fabric welders, used to manufacture everything from inflatable rafts to truck tarps, it’s hard to know the recession of 2007-2009 ever happened.

Ten clocks on the wall of the plant in Navarre, Ohio, show local time from Norway to New Zealand and tell Miller Weldmaster’s comeback story in a word: exports. Sixty percent of the company’s business now comes from outside the United States.

Manufacturing growth, surging exports: These are central promises of Obama’s reelection bid, especially in blue-collar industrial states that could determine the election.

Mindful of the Indiana surprise of 2008, when a spike in unemployment helped Obama win the reliably Republican state, the White House has every reason to fear payback in states like Ohio, this time from any deepening of Europe’s financial crisis.

Already there are warning signs. One in four of Miller Weldmaster’s machines is sold in Europe, and sales are down 5 percent so far this year. A further drop could force the company to consider layoffs.

“We’ve taken a sigh of relief – we’ve been over the crunch,” says Jeff Sponseller, the company’s vice president of sales and marketing. “The chance that this could happen again brings a lot of anxiety.”

Other Ohio manufacturers share that concern. Royal Phillips Electronics, which exports X-ray machines from a 1,200-employee facility near Cleveland, warned in April that budget cuts and other austerity measures in Europe could hurt demand for its products. Glassmaker Owens-Illinois Inc, based in Perrysburg, said Europe’s volatility could hit its earnings as well.

The U.S. Commerce Department estimates that more than a quarter of all manufacturing workers in Ohio depend on exports for their jobs.

Against this backdrop, the Obama administration has been involved in intense, behind-the-scenes maneuvering to steer Europe away from the financial brink.

For the past two years, Treasury officials, including Treasury Secretary Timothy Geithner, have crisscrossed the Atlantic in pursuit of solutions to Europe’s problems. The president has also been actively involved, speaking to European leaders by phone at key moments in the region’s crisis.

His instant invitation to France’s newly elected president, Francois Hollande, to White House talks on the eve of this weekend’s Group of Eight summit is evidence of a central fact in the United States: The states that will do most to determine the outcome of November’s presidential and congressional elections may not be swing states like Ohio but member states of the European Union.

On condition of anonymity, a senior EU official told Reuters it felt as if the Obama administration wanted the G8 to cooperate in the reelection campaign. “They see the debt crisis as the biggest likely drag on the U.S. economy between now and November,” the official said, “and so they basically want to make sure that we find a way of muddling through.”

FRANTIC SHUTTLE DIPLOMACY

U.S. officials say Europe’s woes are already weighing on the U.S. economy, which grew at a tepid 2.2 percent in the first quarter of 2012.

Rather than a hit to exports, the real nightmare scenario for U.S. businesses, banks and policymakers alike would be a chaotic unraveling of the euro zone’s financial system on the scale of the crash that followed the failure of U.S. investment bank Lehman Brothers in 2008.

Then, banks in the United States and beyond were pushed to the verge of collapse by a seizing up of credit, strangling the global economy and more than halving the value of U.S. and global stock markets. The psychological impact demolished consumer confidence as well as the economic track record of the Republican administration, helping hand an historic election victory to Obama.

For the sake of the U.S. economy and the election that no doubt hangs on it, the White House has no wish for history to repeat itself.

Late last year, as U.S. and European officials alike worried the entire single European currency area might fall apart, Treasury Secretary Timothy Geithner embarked on a frantic round of shuttle diplomacy.

Between September and December he flew to Europe five times, sometimes passing through several capitals in a day. Those directly involved say conversations with senior policymakers were often blisteringly blunt.

Officials say the strategy has been clear: to explain what is at stake for the global economy, to offer up lessons from how the United States moved to fix its banks, and to push Europe to do whatever is necessary to hold itself together.

Geithner in April made a fresh call on the European Central Bank, which has been less aggressive than the U.S. Federal Reserve, to help alleviate the crisis.

Even when Europe’s worries eased in the first few months of 2012, U.S. officials continued talking to their European counterparts on an almost weekly basis.

“We’ve been heavily and steadily engaged with them from the outset,” Under Secretary to the Treasury for International Affairs Lael Brainard told Reuters. “It’s too important for our exporters and our workers not to be.”

Brainard, the lead U.S. official on the issue, is already planning her next trip to Europe. It will be her ninth since September.

HOW PERSUASIVE A PRESSURE?

When U.S. officials first raised serious worries over the potential survivability of the euro zone at a meeting of finance ministers from the G7 advanced economies in Canada’s frozen north in February 2010, they say European leaders simply did not grasp the potential scale or impact of the crisis.

Amid the igloos and the dogsleds – and questions over why Canada decided to host the event in such a costly and inaccessible location – they outlined their fears of a potential new crisis.

Since then, they complain, euro zone leaders have struggled time and again to get ahead of events, only to settle on measures that would be too little, too late.

Officials from both sides of the Atlantic with knowledge of these discussions say that even those agreements came after last-minute U.S. pressure, often culminating in direct intervention by Geithner and Obama himself.

Without such pressure, these sources say, the May 2010 meeting in Brussels, which agreed on the first 110 billion-euro bailout for Greece, might never have reached that conclusion.

U.S. officials say they were also instrumental in persuading Europe to perform much stricter stress tests on its banks.

Without the personal intervention of Obama, one Washington insider suggested, former Spanish Prime Minister Jose Luis Rodriguez Zapatero might never have accepted that his troubled economy could no longer sustain its economic stimulus and needed to confront its budget deficit.

Not everyone in Europe agrees that European policy owed quite so much to U.S. pressure. Much of what Washington wanted, they suggest, was already in the works.

“In terms of the conversations, I think they were effective,” said one well-placed European diplomat on condition of anonymity. “But everyone was already aware of the need to address these issues. They were pushing at an open door.”

PRESIDENTIAL TOUCH

The next European leader to get Obama’s personal attention will be Francois Hollande. When Obama phoned him to congratulate him on his election victory on May 8, Hollande found himself invited to the White House much sooner than he or French officials had planned.

Given Hollande will be attending the meeting of G8 leaders this weekend and a NATO summit that immediately follows, his meeting with Obama on Friday has a practical logic. But analysts and officials say there is little doubt the U.S. president will use the opportunity to try to build rapport and stress again the importance of European cohesion.

During his campaign, Hollande sharply criticized German Chancellor Angela Merkel for her focus on austerity to solve the debt crisis. Yet on Tuesday, in a visit to Berlin hours after his inauguration, the two leaders agreed to a joint approach even as they acknowledged their differences.

On the timing of Hollande’s visit to Washington, “obviously, there is an element of convenience here,” said Philip J. Crowley, a former State Department spokesman under the Obama administration. “But there is also a sense of urgency. European decisions could potentially intrude on the U.S. election.”

Hollande’s “pro-growth” agenda is more aligned with the Obama administration’s own stimulus spending than that of his predecessor, Nicolas Sarkozy, who supported the German-led “fiscal pact” that ties euro zone members to tough spending rules. Yet the United States is anxious that Hollande soften his election pledge to renegotiate the pact, potentially jeopardizing the rest of a meticulously negotiated crisis plan.

Finding a compromise between the focus of Paris on growth and Berlin’s insistence on austerity could be easy when compared with the far more difficult decisions that confront Europe.

Greece faces elections in June that could determine its chances of staying in the euro zone. Should it leave, fears will intensify that other countries could follow suit. If Germany wants to preserve the euro, it may have to decide how deeply to underwrite the more troubled Mediterranean states.

“We have much less influence over Germany, where policy is driven by domestic politics,” said Tyson Barker, a Europe specialist and fellow at the Truman National Security Project who says he talks to administration officials most days. “In Greece, which itself might be on the edge of political collapse, I’d say we have no influence at all.”

REPUBLICANS READY TO POUNCE

At home, Obama’s hands are largely tied.

Any new U.S. funding to the International Monetary Fund, which could be used to help fight the euro zone crisis, is considered a nonstarter: With many voters still simmering over the 2008 Wall Street bailout, more U.S. funding for Europe would play straight into Republican hands.

Republicans have tried to revoke $100 billion in previously authorized IMF emergency funding. Although the measure was defeated in the Democratic-controlled Senate, party leaders could still generate awkward headlines for Obama by pushing it in the House of Representatives.

“We haven’t seen a willingness by the European Union countries to change their addiction to government spending and borrowing,” says Republican Representative Cathy McMorris Rogers, who is leading that effort. “It doesn’t make sense to be funneling billions of dollars to bail out Greece, Portugal, Ireland, and other wealthy European countries.”

Advisers to Mitt Romney, Obama’s most likely challenger in November, argue that Obama’s poor stewardship of the U.S. economy has left the United States exposed to the euro zone crisis and limited the administration’s ability to respond.

“We think the Obama administration has limited credibility in Europe because they so badly mismanaged our economy here,” said Kristen Silverberg, a former ambassador to the EU who advises the Romney campaign on European policy.

In reply, Obama’s defenders argue that the recession in several European countries provides proof that his aggressive stimulus effort saved the United States from a deeper slump.

“When President Obama says, ‘Look, we stabilized the financial system, we put in stimulus and the economy walked back from the brink of collapse’ … it’s very hard to do the counterfactual. But now, Europe is the counterfactual,” said Laura D’Andrea Tyson, a former economic adviser to President Bill Clinton who also served on Obama’s jobs council.

Some say that argument will be too complicated to make on the campaign trail.

“Most voters aren’t thinking about any of this,” said Paul Krugman, the Nobel Prize-winning economist who wants further big stimulus spending in the United States. “Voters have children, they have lives, they have jobs. They’re not interested in this stuff except insofar as they want to know if the economy’s getting better.”

RECOVERY AT RISK

Back in Ohio, jobs are easier to find than they were a year ago. The state’s unemployment rate, at 7.5 percent, is at its lowest point since before Obama took office.

Miller Weldmaster is hiring electricians and welders, and a natural-gas boom is luring some workers away with the promise of six-figure incomes.

Still, memories of the recession are vivid, and the company is redoubling its marketing efforts to keep the gathering storm in Europe from eroding its sales further.

“When things get slow, the first thing that goes off people’s list is capital equipment,” Sponseller says. The political fallout from such a downturn, as John McCain discovered in Indiana four years ago, can make all the difference.

The electoral calculus for the 2012 campaign is brutally straightforward. “In good times incumbents are rewarded,” says David Cohen, a political science professor at Ohio’s University of Akron. “In bad economic times incumbents are punished.”

By Andy Sullivan and Peter Apps

(Editing by William Schomberg and Prudence Crowther)

Courtesy of Reuters

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