French and Greeks Vote, With U.S. Economy in the Balance

Events that will take place over this upcoming weekend have the potential to radically alter U.S. economic fortunes, determining whether the United States will be able to sustain economic growth or will face the possibility of a double-dip recession. And none of these events are taking place on American soil.

[See 5 Signs of Life From European Markets.]

On Sunday, French voters are expected to decide whether incumbent President Nicolas Sarkozy will serve another term, or if challenger Francois Hollande will take his place. At the same time, Greeks go to the polls to determine whether to keep the government that has pushed through harsh austerity measures, or replace it with a new one that favors less draconian cuts.

The latest indicators show that Hollande is expected to win, and that the Greek government that favors austerity is in danger of being unseated. According to Scheherazade Rehman, director of the European Union Research Center at George Washington University, these results would be a major setback in the European Union's effort to control its lingering debt crisis.

"If [Sarkozy] loses, the markets are going to take a bit of a hit, and the French will derail [negotiations on how to handle the euro crisis] for three to six months," Rehman says. "Greece is going to elections, and while [Greece] is minuscule in terms of the size of its economy, what happens in Greece impacts the confidence of the market."

"This Sunday is a test for how much more pain Europeans can bear," Rehman says.

[See What to Buy as the Dollar Rises.]

Crisis continues. These elections come at a crucial time in Europe's debt crisis. Fears are growing that Spain, one of the euro zone's larger economies, cannot pay its debt for much longer. These same fears exist in Italy, the third-largest economy in Europe. A change in leadership in Greece and France would make it more difficult to act quickly to contain a crisis in either country.

According to Rehman, if the crisis spreads, U.S. consumers will feel the impact immediately. The U.S. economy grew by 2 percent in the first quarter of 2012. If the crisis in Europe isn't handled, Rehman says she expects this slow growth to come to a halt.

"We're slowed down and are we slowing down as spring passes into summer," she says. "If [the crisis] hits Italy, we're not growing. The spread of this contagion is pretty severe."

Rehman adds that the current 2 percent growth rate is not strong enough to replace jobs lost during the Great Recession. If growth dips below 2 percent or stops altogether, more jobs could be lost. At the very least, employers will be very reluctant to create new ones.

"We need faster growth in order to recover better. But with no job recovery, consumers can't keep up," Rehman says. "If we stay at about 2 percent, I'll be happy. But it isn't enough for this country."

[See How to Protect Your Portfolio With 'Real' Assets.]

Political gridlock, and more manufacturing losses. Stephen Silvia, associate professor at American University's School of International Service, says the most effective way for the United States to deal with a crisis spillover would be political action. But he says political stalemates and election-year politics would prevent the kind of bold action needed to protect the U.S. economy.

"The only thing to hold it down would be something like a TARP," the Troubled Asset Relief Program passed at the beginning of the Great Recession, Silvia says. "But given the Tea Party, it would be very hard to get Congress to address a crisis with the medicine you need to stop it from turning on the American economy."

Even if the crisis is kept from spreading to Italy and Spain, the euro zone crisis is impacting American consumers and workers, Silvia says. With Europeans in an austerity mode, there is less money to spend on goods made in the United States. U.S. banks that hold European paper could also be affected negatively by the continuing crisis.

The crisis could also affect U.S. elections in November. U.S. President Barack Obama has cited slight improvements in the economy as evidence that his policies are working. Presumed Republican challenger Mitt Romney has countered that the president's policies are ineffective and do not do enough. As voters often act based upon the health of the economy, the affect of the euro crisis in the United States could help determine who becomes the next president.



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