By the time you read this today, the fate of the E.U., U.S., and global economies as well as that of President Barack Obama may well have been decided by the most recent summit of EU leaders meeting in Brussels and by the Supreme Court of the United States issuing judgment in Washington.
Only days after the Greek elections and yet another rescue of Spanish banks, the top EU leaders will be meeting today in hopes of preventing a further deepening of the Spanish crisis. But the real name of the game will be Italy. It cannot remain solvent as a country if it must continue to auction its bonds at present interest rates. The country probably has about a month to get the rates down before it will have to face the decision to withdraw from the Euro. That, of course, would also be a decision likely to trigger collapse of the Euro and perhaps also of the EU itself, at least of the EU as we have known it. It's getting to be a simple equation. Italy cannot continue with the Euro and the EU as they are, and the EU cannot really continue with Italy as it is. Something has to give and today is getting awfully close to when it has to give.
The minimum requirement at this moment is that European stabilization funds and/or European Central Bank funds be available in some way for buying Italian and other European government debt so that there is, in effect, a buyer of last resort for such debt that will be able to reduce the interest rates at which it is sold. These arrangements are not a long term solution. They just buy time to get to the solution. But if they can't be done, then there is no more time, and the euro and very possibly the whole EU project are toast. So also will Barack Obama likely be toast.
The EU is by far the biggest market for U.S. exports. I know, I know you keep hearing about China and Asia and emerging markets and how American exports to them are surging. Yes, but they're surging from a tiny base. The EU is where the real export action has always been for the United States and where it remains. Moreover, the earnings of U.S. corporations in Europe dwarf their earnings in all other markets except the U.S. market itself. A renewed recession in the EU would be very negative for U.S. multi-nationals and for the price of their shares on Wall Street. And let's not forget U.S. banks whose full exposure to Europe is not fully known but who surely will not escape damage from turmoil across the pond. The totality of all this would almost surely push the United States back into recession and dramatically increase the chances of Obama being a one term President.
Now, let's suppose that the Supreme Court also declares Obama Care unconstitutional, at least in part. Out of control health care costs are already eating up twice as much of U.S. GDP as in other major countries. With new uncertainty about the future of U.S. health care regulations and coverage and no long term cost abatement measures any longer in place, the outlook would be for health care to be taking 20-25 percent of GDP within five to ten years. That would surely discourage investment, production, and GDP growth in the United States. And also throw Obama's chances into further question.
But, wait. Obama's been an incredibly lucky guy all his life. Maybe the EU will find a way to save Italy and the Supremes will find a conservative justice to vote for upholding ObamaCare. Remember, the only sure thing in life is the unexpected.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.