Obama to G-20 summit: Yes we Cannes

Greece’s decision to hold a referendum on the European debt deal has cast a shadow over President Obama’s trip to sunny Cannes, France, for a G-20 meeting.

It is also creating new doubts about an economic recovery that would be crucial for Obama’s reelection bid.

Obama’s trip looked like it would be filled with celebratory backslapping with Angela Merkel and Nicolas Sarkozy after the German and French leaders helped broker a rescue plan to bail out Greece.

But hopes for a collegial session were dashed when Greek Prime Minister George Papendreou announced he’d seek a referendum that would allow his country to reject the bailout plan.

{mosads}Given Greek grumbling about the terms of the bailout, and worries it will usher in more years of difficult sacrifices for a nation with an unemployment rate of 16.5 percent, Papendreou’s move could sink the deal.

Obama, quite naturally, is probably more concerned with the 9.1 percent unemployment rate in the U.S., which is the biggest threat to his reelection bid. No president since Franklin Roosevelt has been reelected with a jobless rate that high.

Lawmakers and the Federal Reserve also are worried about the unemployment rate, and frustrated with an economy that still is sputtering three years after the financial crisis.

“Unfortunately, we can’t dissociate ourselves from Europe; the things that happen over there do affect us,” Federal Reserve Chairman Ben Bernanke said Wednesday at a press conference. “It is a bit frustrating.” 

Yet there is little Obama or members of Congress can do about the EU debt crisis, the outcome of which could determine whether the global economy thrives or dives in 2012.

Washington’s impotence was spelled out last week by Jacob Funk Kirkegaard of the Peterson Institute for International Economics.

“For straightforward reasons of accountability, the euro-area crisis should be dealt with overwhelmingly by European policymakers using European financial resources and being guided by European political norms, traditions and institutions,” Kirkegaard said in written testimony to the Senate Foreign Relations Committee.

“The ability of the U.S. government to directly and bilaterally affect the outcome of the euro-area crisis is consequently and appropriately limited.”

That’s not to say that Obama and the U.S. don’t have a lot at stake in Europe.

The European Union is the largest destination of U.S. exports and foreign direct investment. The biggest trans-Atlantic link is the financial system. If Europe’s banks fall, U.S. banks will be hit hard.

Bernanke said the Fed will monitor domestic financial institutions for potential exposure, and do its part to boost the economy overall. On the EU crisis, he said the Fed stands “ready as necessary to provide broader support.”

Without the EU crisis, newspaper headlines might be about optimism for the U.S. economy, which obviously would be beneficial to the White House.

Stocks soared last week after Europe reached a deal, and it appeared the economy might be on an upswing. The U.S. economy grew at a 2.5 percent rate in the third quarter — not enough to reduce the unemployment rate, but better than the anemic growth recorded earlier this year.

A report from private payroll processor ADP on Wednesday found the private sector added 110,000 new jobs in October, a bit higher than expected. ADP also ticked its estimate for September up to 116,000. That led the Dow Jones Industrial Average to a triple-digit gain in the morning. 

Fuel prices have dropped, and U.S. consumers are starting to spend instead of save. Consumer spending increased by 2.4 percent in the second quarter, according to a recent report to the Treasury Department. Consumers reduced their savings rate from 5.1 percent in the second quarter to 3.6 percent in September. MasterCard’s profits jumped 36 percent in the third quarter.

Business investment has also picked up. Outlays on capital expenditures rose at a 16.3 percent rate in the second quarter, while real spending on equipment and software increased at a 17.4 percent clip, according to a report by a Treasury Department advisory group.

None of that means the unemployment rate will plunge when the government releases its findings for October on Friday, but it does suggest the possibility of a double-dip recession is fading while prospects for growth are rising.

And it provides hope for the White House and for Democrats in Congress, who know an Obama meltdown on Election Day would ripple down the ticket.

In an interview, Kirkegaard said there’s little doubt the EU crisis is stifling growth, though it’s impossible to guess how much it is shaving from U.S. GDP.

“It adds to the general uncertainty among businesses and consumers,” he said.

Businesses are still sitting on capital, and Kirkegaard said a likely reason is the worries about Europe.

It’s also not a problem that’s going away anytime soon, meaning the political impact in the U.S. of the EU crisis will likely still be felt come November 2012.

“I think it’s safe to say this is going to be with us for a substantial time, at least some years,” Kirkegaard said.