Will Europe decide who is the next U.S. president?

This entry was posted on Friday, June 22nd, 2012 at 2:24 pm and is filed under Chamber News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Editor’s note: this post was authored by Darin Mellott, senior analyst at CBRE, and was originally published on ksl.com. Mr. Mellott is a member of the Chamber’s Utah Economic Council.

Elections in Greece maintained the potential to set off a chain of events capable of destabilizing the global financial system on a scale not witnessed since 2008, after the collapse of Lehman Brothers.

Greek citizens voted for the second time in less than two months to elect a new government during this time of crisis. On one hand, the two most historically prominent parties (New Democracy and Pasok) agreed to the terms of the recent bailout for Greece. On the other hand, Syriza a party that promised the Greek people that they would not abide by the terms of the past bailout, but keep the country in the Eurozone had a strong showing. The Greek people chose the safest way to stay in the Eurozone for the short-term. Election results were able to produce a coalition government between the New Democracy, Pasok and Democratic Left parties that will likely be sworn in today.

Last Sunday’s elections were important, because European nations contributing to the bailout (most prominently Germany) indicated that failure to abide by its terms would be unacceptable. Without a scheduled disbursement of funds, Greece would run out of money by July. At that point, an inability to meet obligations would introduce the possibility of Greece reverting back its old currency (the Drachma) to pay bills. This process would not have a legal framework and inflict large losses on loans made by the European Central Bank, private banks from around the world and other European countries.

This mess would not be contained to just Greece either, because markets would then focus on the next weakest members of the Eurozone including Spain and Italy. Nobody knows exactly how such a scenario would play out, but it would be disruptive and fear would surely exacerbate any effects.

Election Influence

What does this have to do with the U.S. Presidential election? The short answer is: a lot. Even President Obama in recent speeches is making the point that what happens in Europe will affect us here. The President and his team understand that the crisis could affect America’s economy enough to influence fall elections.

With so much focus on the economy, it is worth examining how economic data and election calendars will interact. First, sentiment is heavily influenced by the stock market. Events such as elections of the past weekend in Europe produce uncertainty and uncertainty breeds volatility, which then affects sentiment. Aside from the stock market other data releases will surely drive headlines and affect election outcomes. Just take a look at other prominent indicators such as GDP and monthly jobs report from the Department of Labor.

Economic Data

Updated second quarter GDP numbers will be released on August 29th during the Republican National Convention. This will either hurt or amplify the likely message coming out of Tampa that the economy is weak. At the present time, second quarter growth looks weak and somewhat similar to the first quarter. Similarly, a jobs report will be released on September 7th just after the Democratic National convention, which will either hurt or amplify the message coming out of Charlotte.

On September 27th, another GDP report will be released, setting the stage for the Presidential debates in October. If the election is decided during debates and data is poor and reaffirmed as such at the end of September, the debates will be difficult for President Obama and benefit Mitt Romney. However, if data is better than anticipated, trends matter and it will benefit the President.

The first look at third quarter GDP will come in on October 26th, after the last debate. If polls remain close and neither candidate delivers a knockout punch during the debates, then this could tip the scales in a close race. Again, trends matter if there is a feeling of improvement that benefits the incumbent, while the reverse is also true.

Going back to employment, there is a jobs report on November 2nd, the Friday before Election Day. In a close race, this report alone could determine control of Congress and who the next President is, because it is widely reported and whoever it does not benefit will have little time to react to the news.

Economic data, needless to say will be very important during the last few weeks of the campaign. If second quarter data is poor, the narrative changes early-on; such a scenario would benefit Mitt Romney. However, if data improves, that will benefit President Obama who maintains considerable advantages as an incumbent. The biggest factor will be perceived momentum of the economy going from the second quarter through the third quarter. If perceived momentum is slowing, Romney holds an advantage. Again the reverse is true, if perceived momentum is improving, President Obama benefits.

Market Focus

In the middle of election season, markets are sure to begin focusing even more intently on the debt ceiling and expiration of tax cuts and automatic spending cuts already written into law, known as the “fiscal cliff.” This, in addition to problems in Europe, is sure to increase volatility in markets and increasingly affect the real economy as consumers and decision makers delay decisions and reign in spending due to uncertainty.

The reality is much can happen between now and the election, affecting its ultimate outcome. However, it is a sure bet that economic data will influence the election and provide some clues about who the ultimate winner will be.

When it’s all said and done, newly elected leaders will not have much time to act. The fiscal cliff will need to be addressed and at least temporarily remedied within a matter of weeks between the election and end of year. In addition to policy at home, policymakers will also face dangers and concerns from abroad.

All elections are consequential in some respects, but a unique convergence of events and recent episode of policy paralysis around the world make this one particularly important. Interestingly, events shaping economic performance and by extension the election may have origins in places not normally associated with an American politics. While nobody knows exactly how things will play out, there will be clues along the way and the economic data release calendar is a good place to start looking.

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