By Mujtaba Rahman and Willis Sparks
It's not easy to unseat an incumbent U.S. president. In 80 years, only Ronald Reagan (1980) and Bill Clinton (1992) have done it, and while it's too soon to say how close the current race will be, it's clear that Republican challenger Mitt Romney lacks the ease, warmth, and charisma of these two remarkable political talents. Mitt Romney needs a boost.
Given that U.S. economic data points to a recovery that doesn't appear on the verge of either a surge or a sharp reversal, the most obvious risk for the Obama campaign is a substantial market meltdown in Europe in September or October, one that sends Wall Street into a tailspin and generates consumer and investor fears that the U.S. economy is again headed in the wrong direction. Though Europe's markets may well endure a rough ride this fall, a substantial meltdown is unlikely. But given the likely timing, it's a risk that both candidates are thinking about.
For now, President Obama is winning. Despite historically high unemployment and continued consumer anxiety over the state and direction of the U.S. economy, current polling in the states likeliest to decide the election gives President Obama several credible paths to victory. Judging by their spending habits, the two campaigns and their allies believe the race will be decided in Ohio, Florida, Virginia, North Carolina, Colorado, Nevada, Iowa, New Hampshire, and perhaps Wisconsin. Romney will have to win six or seven of these nine states to earn the 270 electoral votes needed to win, and only in North Carolina does he enter the fall with a clear lead.
Given the country's intense current partisanship, party faithful on both sides are likely to vote in large numbers this November, and the outcome of a close election will depend on the choices of genuinely independent voters, a group that represents about 10 percent of those likely to cast ballots. This is, by definition, the least ideological segment of the U.S. electorate, and these voters are most likely to vote based on perception of the president's competence and on confidence in his leadership rather than on fidelity to a defined set of social and political values. That is why, though he remains the favorite, President Obama remains vulnerable to external events over which he has little direct influence.
Which brings us to Europe. The autumn to-do list facing Eurozone leaders is daunting. They must agree on another broadly unpopular bailout for Greece, manage volatility in Spain and Italy, and create a credible new Eurozone-wide bank supervisor to make future crises both less likely and less costly to manage when they occur. They must also agree on a concrete and detailed plan to address the Eurozone's original design flaws, and they must do all this with jittery investors watching their every move.
Why is the fall likely to be an especially volatile time? Greece will return to center stage in September, given the additional financing needs that have been created by poor growth, a bureaucracy slow to implement promised reforms, and the possible extension of fiscal targets. Creditor countries are not eager to help, and they may demand that Greece's government enact reforms before help is provided, leaving Greek officials caught between an increasingly angry public and the expectations of those who can help. In the meanwhile, warnings from creditors -- designed to keep pressure on Greek officials -- will keep markets on edge. Also in September, we can expect a ruling from Germany's constitutional court on whether the Eurozone's proposed bail-out fund-the center piece of Eurozone leaders' response to the crisis-is legal.
Then there is the trouble in Spain. Current yields on Spanish debt reflect market expectation that the European Central Bank (ECB) stands ready to backstop Spain. That's an overly optimistic assessment, because ECB President Mario Draghi has detailed the pre-conditions for the bank's help, and those conditions have not yet been met. To satisfy Draghi's requests, the Spanish government must first make use of sovereign-backed bailout mechanisms in conjunction with a reform program. But unless and until market pressures force him to, Spanish Premier Mariano Rajoy is unlikely to ask for help, increasing the risk of market turmoil.
Also this fall, the European Commission is due to propose plans for a single pan-Eurozone supervisor, part of a deal agreed by Germany in June that will pave the way for direct recapitalization of Spanish banks instead of an indirect path through Spain's government. But many controversial issues remain, not least the separation of national from EU-wide supervisory powers and a decision on whether all Eurozone banks will be covered or whether some countries, especially France and Germany, can negotiate exemptions. Without this measure of reassurance, lenders may again drive rates dangerously high.
Even if agreements on all these issues are reached with a minimum of friction, there is no guarantee that the creation of a supervisor will be enough to shore up vulnerable banks, provoking new anxieties and more market pressure on the bloc's weaker economies.
Will all these potential problems generate enough fear in September and October to send European, and then U.S. markets, reeling? Probably not. But the risk is real, and the timing is ominous. You can be sure that the Obama and Romney campaigns will be watching closely.
Mujtaba Rahman is an analyst in Eurasia Group's Europe practice. Willis Sparks is an analyst in the firm's Global Macro and United States practices.
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By Willis Sparks
Before the Republican National Convention opens the 2012 presidential campaign season on August 27 and returns the country's focus to its domestic hopes and fears, Mitt Romney is headed abroad to try to build some credibility on foreign policy. Having focused his campaign almost exclusively on the fragile U.S. economy, Romney wants to narrow Obama's polling advantage on foreign policy questions and offer an image of himself as "leader of the free world." The most obvious way to accomplish this is to stand alongside key U.S. allies facing traditional U.S. foes. Romney will make stops along the way in Britain, Israel, and Poland.
The visit to London is a reaffirmation of American foreign policy tradition and a chance to place Romney inside the "special relationship." With his appearance at the London Olympics, it's also an opportunity to remind voters of the leadership Romney brought to the 2002 Salt Lake City Winter Games -- the least controversial line on his resume.
The stop in Jerusalem underlines another special relationship -- and reminds voters that Obama has yet to visit Israel as president. It's certain to produce warm photos of Romney with Israeli Prime Minister Benjamin Netanyahu, old friends who met while working together at Boston Consulting Group in 1976. The images will offer a stark contrast with the frigidly formal shots we've seen following Netanyahu's strained meetings with Obama. Romney will promise that Iran will not build a nuclear weapon on his watch -- and (at least) imply that a nuclear Iran is inevitable if Obama is re-elected.
And Poland? A Pew poll released in June found that only 50 percent of Poles express confidence in Obama. Compare that with 80 percent in Britain, 86 percent in France and 87 percent in Germany. In some cases, this is a legacy of the preference among some Warsaw Pact countries for Republican presidents, but it's also a function of some notable Obama mistakes.
Obama trod on Poland's diplomatic sensitivities in May when he referred to Nazi concentration camps located in Poland as "Polish death camps" during a ceremony to bestow America's highest civilian honor on a Polish resistance fighter. Expect Romney to honor the Polish victims of Nazi atrocities.
And don't forget Obama's live mic gaffe with Russian President Dmitri Medvedev, the one where he asked outgoing president Medvedev to ask incoming president Putin for "space" in exchange for "flexibility" on the question of U.S. missile defenses scheduled to be deployed in Poland and the Czech Republic. Romney hopes his visit to Poland, at the invitation of former Polish president and anti-Communist icon Lech Walesa, will help him make the case that only he can forcefully meet threats from Russia, which he has (oddly) labeled America's "no. 1 geopolitical foe," carrying on in the tradition of uncompromising Cold Warriors like Ronald Reagan.
Governor Romney can't match the ecstatic reception candidate Obama received in Berlin in 2008. Nor can he share credit for killing Osama bin Laden or ending the unpopular war in Iraq, Obama's signature foreign policy achievements.
But he can remind voters that Republican presidents like to draw clear lines between America's friends and foes -- and that while Obama remains remarkably popular in much of the world, at least a few U.S. allies are probably hoping for a Romney win.
Willis Sparks is an analyst in Eurasia Group's Global Macro and United States practices.
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By Carroll Colley
While Russia will enter the WTO in late August, U.S. industry will be left on the sidelines until Congress removes the Cold War-era impediment to greater trade between the former foes. But it's a safe bet that Congress won't graduate Russia from the Jackson-Vanik amendment, which is necessary to grant permanent normal trade relations to Russia and take advantage of its accession to the WTO, before the November election. The reason? Russia is perpetually steeped in controversy, and U.S.-Russia relations have become a campaign issue in the race between Republican Mitt Romney and President Barack Obama. U.S. industry likely won't be able to take advantage of greater market access in Russia until the lame-duck session at the end of the year, and possibly later.
The White House is much more focused on November 6 (Election Day) than August 23 (the approximate date of Russia's WTO entry). Only after repeated requests from Republican lawmakers for senior level officials to testify on the Hill -- widely viewed as a Republican maneuver to force the administration to speak on the record about its Russian policy -- did the administration relent by sending the duo of Deputy Secretary of State William Burns and U.S. Trade Representative Ron Kirk to testify before the House Ways and Means Committee and the Senate Finance Committee. The White House calculates that a "yes" vote on graduating Russia from Jackson-Vanik (a 1974 provision that ties trade relations to freedom of emigration and other human rights considerations) would have little electoral upside, and might even harm Obama before the election.
Obama's meeting on June 18 with President Vladimir Putin on the margins of the G20 in Los Cabos seemingly failed to produce a breakthrough on Syrian policy. Headlines about ongoing arms shipments bound for Syria and the potential for continued Russian intransigence at the U.N. Security Council also represent potential political liabilities during the election home stretch, not to mention a host of domestic political issues. Romney, meanwhile, has called Russia the U.S.'s greatest political "enemy" -- and later changing that description to "foe" -- because he senses a potential weakness in an Obama foreign policy that has otherwise produced several notable successes.
It would be much simpler, politically, if supporters of graduating Russia from Jackson-Vanik could cast it as a vote for American business, as Secretary of State Hillary Clinton did in a recent opinion piece. But they can't. Passage is complicated by the Magnitsky bill, human rights legislation that targets government officials involved in the case of Sergei Magnitsky, a Russian lawyer who died in police custody in 2009. Largely viewed as a replacement for Jackson-Vanik, the stated aim of the bill is to deny visas to corrupt officials, freeze any U.S. accounts they have, and publish their names. The reality is that the Obama administration last summer instituted its own visa ban and any potential offenders have long ago transferred any funds from the U.S.. The net effect of the bill, therefore, is the "naming of names," which would represent a significant embarrassment to the Putin regime. The bill enjoys broad bipartisan support, with a number of lawmakers stating publicly that passage of the Magnitsky bill is a prerequisite for their vote on Jackson-Vanik.
The Obama administration has sent contradictory messages about its support for the Magnitsky bill. While originally opposing the bill, the administration seems to have accepted the inevitable and has been working with its primary author, Democratic Sen. Ben Cardin of Maryland. One recent Senate version provides for the public list as well as a confidential annex, which would largely allow the administration to circumvent the thrust of the bill by invoking national security exemptions. This is strongly opposed by a number of senior lawmakers, including Sen. John McCain, who was a co-sponsor of the effort to repeal Jackson-Vanik on the caveat of corresponding passage of the Magnitsky bill.
As the August recess rapidly approaches, the window for graduating Russia from Jackson-Vanik prior to its WTO accession closes. Obama appears to have little room to maneuver in expending political capital on the matter without raising the risk of elevating Russia-and its collateral baggage including Syria, Georgia, Iran, and domestic protests-to a legitimate campaign issue. Unless Congress moves forward on its own prerogative-which appears unlikely-the repeal of Jackson-Vanik won't get passed before November, or later, leaving the world's largest economy unable to take advantage of the accession of the WTO's newest member.
Carroll Colley is the director of Eurasia Group’s Eurasia practice.
Today, we turn to risk #4 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
The United States- Right after elections. Congress won't accomplish much as members face re-election and the presidential horserace develops over the first ten months of the year. But once the votes are counted, a couple of multi-trillion-dollar decisions with substantial long-term importance must be made quickly.
Q- You say that the lame duck session will be especially important this year. Why are the stakes so high?
A- Decisions have to be made by the end of 2012 on the future of the Bush tax cuts and on whether to waive the automatic spending cuts triggered by the failure of the congressional super-committee to agree on a long-term deficit reduction deal. Together, these issues will involve more than $5 trillion over the next decade, an amount large enough to have lasting influence on the trajectory of the U.S. economy. Even if there were more clarity on who will win the presidential election and on the post-election congressional balance of power, it would still be difficult to predict whether (and exactly how) the two parties can resolve these looming questions. In the meantime, companies and investors will have to cope with a lot of uncertainty in 2012 -- particularly about their own taxes and government contracts. This uncertainty will also weigh on economic growth this year.
Q- Isn't it possible that Democrats and Republicans will fail to agree on anything and that nothing will happen?
A- It's always possible that the leadership of the two parties and the White House will fail to reach a deal. But in this case, the failure to decide is a decision, because higher taxes would automatically go into effect and $1.2 trillion in cuts to government spending will move forward. Should lawmakers fail to agree on a solution by January 1, the next Congress could move in 2013 to retroactively reverse the impact. But the next class of legislators may prove no more amenable to compromise than the current one. Even if they succeed, these adjustments and readjustments would prove highly disruptive.
Q- How will the election results play into this risk?
A- If either party takes a big hit at the polls, its leaders will have clear incentives to reach a deal on tax and spending policies before their numbers decline in the new Congress. The other side would then have most of the bargaining leverage. But if the elections produce a continuation of divided government, the two parties would be much more likely to deadlock. The realistic best-case scenario is not so great either: Both sides could agree before the end of the year on yet another temporary fix, such as a partial or full extension of the tax cuts, combined with a delay on automatic spending cuts, and punt a solution to 2013. That outcome would be less disruptive than an expiration and a retroactive fix, but it would extend the uncertainty that companies and investors dread into next year.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.