will return to the forefront of concerns over the next few weeks, while President Obama and presumptive Republican nominee Mitt Romney focus on rallying their bases at political conventions this month. A flare-up in Europe, however remote, would likely strike the fragile U.S. economy and according to past trends severely damage Obama’s approval rating and re-election campaign at a critical juncture.
Gallup reported last week that the president’s approval rating on the economy was a lowly 36 percent, a figure that dropped to 26 percent in the aftermath of the federal government downgrade last summer as worries about double-dip recession reverberated around the country.
Newly elected Greek Prime Minister Antonis Samaras meets on Friday and Saturday with German Chancellor Angela Merkel and French President Francoise Hollande. And in September, European officials will issue a report evaluating the Greek government’s progress in cutting roughly $17 billion from its budget in order to receive a $39.3 billion emergency loan that’s part of a larger bailout package.
"With every event, there’s an update on the probabilities that things will unravel," Ben Herzon, a senior economist at the forecasting firm Marcoeconomic Advisers, told The Fiscal Times.
In its latest U.S. GDP projections, Macroeconomic Advisers predicts that growth will be restrained by Europe, even if it doesn’t totally blow up. The chance of self-combustion, however, is slightly better than New York Yankee Derek Jeter successfully hitting a baseball – one-in-three.
"A significant re-intensification of the euro zone crisis with material spillovers to the U.S. – mostly financial, but trade, too – would make for a much worse economic outlook than presented here," the August 13 outlook said. "The probability of such a scenario sometime in the next couple of years remains high, roughly one-in-three."
The question is no longer whether Greece fails – Citibank pegs the odds of the country exiting the euro currency at 90 percent – but when and whether the potential damage can be contained to that country alone.
Jean-Claude Junger, the prime minister of Luxembourg who also heads the group overseeing the shared currency, said after meeting Thursday with the Greek prime minister that any decision on Greek aid would depend on the progress report slated to be released next month.
"Additional cuts will not sit well with a population that has been struck by austerity fatigue – expect significant opposition to the measures when they are brought to a vote in parliament in September," the consulting firm Roubini Global Economics concluded in response to the announcement. "We stick to our view that Greece will choose to exit the [euro zone] as early as Q1 2013."
Bedlam could then easily spread to the fragile economies of Italy and Spain, with their borrowing costs surging to paralyzing levels and the resulting panic largely being transmitted to the United States through the stock and bond markets. European turmoil would also continue to choke off growth in China, which would further ratchet up pressure on the United States.
When the situation last turned grim for Europe in May, the Dow Jones Industrial Average tumbled by 8.42 percent over the next month. The market began to recover shortly before Samaras was elected prime minister and the country appeared to re-commit to the terms of its second bailout by fellow members of the euro zone. And all of that means that the euro as a currency could collapse, Matthew Lynn of Strategy Economics wrote in a Wednesday analysis.
"The truth is no one really knows [when]," he wrote. "The euro could stagger on from crisis summit to emergency bailout for another decade. Then again, it could be gone by the end of the month – if Greece is refused its third bailout, the country may be kicked out, and the entire currency could unravel over the course of a few chaotic days."
Both Obama and Romney have acknowledged that the United States has limited options for assisting Europe at this stage.
"They understand the seriousness of the situation and the urgent need to act," Obama said at a June press conference. "What we can do is to prod, advise, suggest, but ultimately they're going to have to make these decisions."
Romney, who declined to visit the euro zone during his foreign tour in July, told CNBC, "If [Obama] had been able to get America back on track, why, we would be looking at what happened in Europe as being a problem, but certainly not devastating."
Treasury Secretary Tim Geithner is confident the sovereign debt woes can be resolved, though he highlighted the difficulties and risks to the United States during an appearance in Los Angeles this month.
"We have an enormous stake, strategic and national security interests – not just economic interests – in Europe getting through this," he said, noting that Greeks can’t afford to buy medicine, that about half of Spain’s youths are unemployed, and that there’s been a worrisome rise in political extremism, such as the alleged neo-Nazi party Golden Dawn winning seats in the Greek parliament.
Geithner said Europe must balance the need to stop a European collapse with maintaining the pressures from the bond markets that will give the countries an incentive to undertake needed reforms. "What Europe’s trying to do now is make sure they do enough to hold things together, lay the foundation for stronger growth in the short-term, bring down interest rates so that they have some time for a lot of the reforms to work," he said. "And that is an exceptionally difficult political thing to do in any country."
But not everyone thinks the possibility of a European meltdown could upset the U.S. political landscape.
Obama might have been saddled with a recession had the situation in May taken a turn for the worse, but the immediate affects from anything happening in September are questionable, said Nicolas Veron, who has fellowships at the Brussels-based think tank Bruegel and the Peterson Institute for International Economics.
"The impact will probably be felt with a lag," Veron said. "It’s not going to drive the economic experience of most U.S. voters in the next two months. In a way, U.S. voters have been used to seeing Europe as a mess over the past two years. A headline like: ‘Europe is a Disaster.’ How much news is this?"