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How Europe Saved Obama

September 19th, 2012

That’s the title of a piece that I wrote for the National Interest, responding to the ECB decision to undertake unlimited bond purchases. There’s been lots of news since then (on which I’ll write if I get time), but it only confirms the key point – Romney’s dwindling chances relied heavily on a European economic crisis happening before November, and that is now highly unlikely. The key paras

When Barack Obama celebrates his second inauguration next January, the man who did most to ensure his election victory is not likely to be there. But perhaps the president should make a note to reserve a seat for the head of the European Central Bank.

With no convention bounce and little prospect of a convincing win in presidential debates, challenger Mitt Romney’s hopes have been centered on an October surprise. Under the current circumstances, that means an economic shock sufficient to discredit Obama’s promise of a slow but steady recovery from the economic crisis. Until last week, that shock seemed likely to come from Europe. The possibility of a Greek exit from the euro, seemingly off the agenda a few months ago, had reemerged as a major factor in the investment plans of U.S. companies.

Last week, however, new ECB president Mario Draghi finally bit the bullet. Announcing that “the euro is irreversible,” Draghi committed the ECB to unlimited purchases of government bonds. Weidmann, the sole dissenter on the ECB board, has so far not carried out his threat to resign.

The ECB decision marks an effective end to the euro-zone sovereign-debt crisis, though not to the European depression or to the failed policies of austerity. At best, the euro zone is now in the same position as the United States and Britain: there is the prospect of a sluggish recovery but no immediate danger of collapse. A true recovery will require both a shift in central banking policy from targeting inflation to targeting nominal GDP, which looks a bit likelier now, and a shift from austerity to fiscal stimulus, which does not.

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  1. NickR
    September 19th, 2012 at 11:10 | #1

    It is true that stability in Europe removes a big game changer for Romney and hence lessens his chances for the White House.

    However a number of recent pieces have suggested that the election result is now more or less a formality, a claim that seems very premature.

    Consider the following:

    1. We still have the debates to come. There are plenty of banana skins there for both candidates and as the leader Obama has everything to lose.

    2. Romney has a lot of money to spend in swing states over the next six weeks. This will almost certainly have an effect.

    3. Obama’s lead might be robust but it is still quite small. It is not unusual for polling averages to be out by a point or two, especially as voter turnout will be difficult to predict this year.

    4. There is still one more unemployment report to come before the election. Given the weekly claims data over the last few weeks it probably won’t look good.

    Can Obama overcome these things? Yes, and he probably will, but there is no room for complacency. FiveThirtyEight has Obama at about a 75% chance while Intrade has 65%. You’d rather been in Obama’s shoes than Romney’s but it is far from over.

  2. Ikonoclast
    September 19th, 2012 at 11:19 | #2

    I don’t think the European Union is “out of the woods” yet. However, they have probably staved off major problems long enough to assist Obama’s election chances.

    To my mind, The EU’s problems are partly to do with horizontal fiscal imbalance. How does uncompetitive Greece (which would benefit from currency devaluation) cope when it is tied to the same currency used by the most competitive nations like Germany? Greece is like a relatively poor and uncompetitive state in a Federation (say Tasmania in Australia). However, in Tasmania’s case the Federal government assists it by following a horizontal fiscal equalisation (HFE) policy.

    Unless, the EU implements a full and effective HFE then it cannot expect uncompetitive countries or zones to ever climb out of the hole they are in. I assume the EU does not have a full and effective HFE in the sense that Australia does. Am I right or wrong in this assumption?

    Essentially I am saying countries like Greece must have their own currency or be part of a monetary union which incorporates proper horizontal fiscal equalisation. Am I wrong in these statements?

  3. Tom
    September 19th, 2012 at 12:02 | #3

    @Ikonoclast

    I agree to a large part of your comment. Fiscal union can be the best medicine of the current EU crisis if not politically impossible. With regards to EU, since austerity is the condition for unlimited government bond purchase; there is a large chance for EU to end up like Japan. Which means continuous accumlation in public debt as a % of GDP while the economy will not collapse but is accompanied with deflation, high unemployment, and low or negative GDP growth.

  4. Dan
    September 19th, 2012 at 12:18 | #4

    @Ikonoclast

    Nope, you’re spot-on.

    Significant overlap with Yanis Varoufakis’ description of (the need for) a surplus recycling mechanism.

  5. Freelander
    September 19th, 2012 at 13:21 | #5

    This fiscal union lack of memento is monotonous nonsense.The whole “problem” is somewhat of a beat up despite merkel and the ECB ‘s gross ineptitude.

    The Euro crisis is properly understood by recognising the zone has not adopted English as their first language, the red, white and blue, or union Jack as their flag, or chopsticks as their culinary utensils of choice.

  6. Freelander
    September 19th, 2012 at 13:22 | #6

    Memento, meme methinks.

  7. Freelander
    September 19th, 2012 at 14:55 | #7

    Don’t know whether Obama had a role, but the convenient DSK “honey pot” seemed a divinely inspired god helps those who help themselves. How DSK must rue ever having spoken ill of the US’$ crumbling currency during his soon after curtailed IMF gig. Well at least DSK ‘s exit preferable to Robin Cook ‘s and whatever they have planned for Assange.

  8. Katz
    September 19th, 2012 at 16:06 | #8

    Speaking of banana skins:

    http://www.youtube.com/watch?v=rBj0joyCeag&feature=youtube_gdata_player

    The Republicans are now eagerly looking forward to 2016.

  9. Ernestine Gross
    September 19th, 2012 at 16:43 | #9

    Weidmann has no longer a reason to resign because of the September German High Court decision.

    I suppose it is wise to not go into details about the ‘unlimited purchases of government bonds’ until after November.

    I suppose it is also wise to integrate knowledge of the actual operations of financial markets into political decisions on both sides of the Atlantic. (If my underlying hypothesis is right on this one, then Merkel and Hollande aren’t as far of course as what might appear.)

  10. Daybee
    September 19th, 2012 at 18:38 | #10

    Peter Hartcher’s view that Aussies were poor judges because they tipped Obama to win now looks even sillier. As of yesterday, Betfair punters were offering identical odds ($1.34) on Obama (last week he was $1.51) and Abbott (last week $1.20) to win the next election.

    Wish I’d stuck a few bob on the Gillard/Obama double last week!

  11. Robert (not from UK)
    September 19th, 2012 at 19:51 | #11

    When, Professor, will the article be appearing (assuming that The National Interest does do the decent thing by printing it)? It seems a remarkably short lede-time is being contemplated by the magazine, what with the US election and all.

  12. Robert in UK
    September 19th, 2012 at 23:07 | #12

    This seems like a very good point (about the EU presenting a downside risk to Obama) nestled in a very overconfident prediction about the election result! As of today, Obama is only +1 in the Gallup tracking poll, and behind in Rasmussen. There’s mounting evidence of weakness in swing states (Colorado, Wisconsin). Romney still has a pile of cash on hand. I agree if the election was today O would win. But the election isn’t today.

  13. Robert in UK
    September 19th, 2012 at 23:30 | #13

    To be clear, I agree with the analysis of the ECB decision. I just think the election is still a 60/40 proposition in Obama’s favour. You seem way too confident, JQ.

  14. paul walter
    September 20th, 2012 at 14:31 | #14

    The sort of thread starter that makes me grateful I can come here. A humble thanks from this quarter.

  15. Freelander
    September 20th, 2012 at 15:39 | #15

    I’d put the odds heavily in favour for an Obama win.

    Only a “black swan” event could yield a moron victory now.

  16. John Quiggin
    September 20th, 2012 at 16:42 | #16

    @Robert (not from UK)

    D’Oh! It was published a few days ago and I forgot to include the link. Fixed now, I hope.

  17. Freelander
    September 23rd, 2012 at 15:19 | #17

    On the Obama issue, black swans conjured into existence by helicopter Ben and his latest in the QE follies, QE Infinity do now seem possible as we move into that all important October month.

    If commodity markets get spooked that inflation or hyperinflation must at some stage be inevitable, the seemingly sure thing bets on commodities priced in US dollars will happen. Then some bright sparks will place their bets on the US dollar falling (do I hear collapse anyone) and the Euro conjured problems will have trouble making page one.

    But what might happen, need not and doesn’t always.

  18. Freelander
    September 23rd, 2012 at 15:24 | #18

    Even with black swans on the water Obama might get another term. Frightened children may turn to the “murderer in chief” they know, in preference to the moron in waiting.

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