U.S. Recession Could Follow Greek Exit from Euro
Even if President Obama is elected, he will likely still have a strong Republican House. Emboldened by their November triumphs, neither side will be in the mood to do much compromising, but they will find some creative way to kick the can. If Obama is a lame duck, double that assessment, and Romney, constrained by the lack of 60 Republicans in the Senate, would not be able to accomplish much more immediately.
Business uncertainty in this climate makes the 2.5% forecast unrealistic, and amid all this international and domestic turmoil, and a 1% hit to U.S. GDP growth from a Greek exit from the euro could easily slow U.S. growth to less than 1%. That is too weak to be sustained, and a recession could easily result.
Still after a year or two, Europe would reemerge, and that would improve U.S. long-term prospects -- a prosperous Europe is critical to American prospects. The alternative in Europe is continued turmoil and stagnation, or long term contraction and decline, as it tries to make an unworkable currency regime work. The long term economic and security consequences for the United States are too negative to willing accept.
The euro has failed, and time has long passed for Greece to bail out. Sooner or later, Spain, Portugal and perhaps Italy and Ireland, will have to follow, but after the world does not end with Greek withdrawal, those would be easier and less painful decisions to manage.
The euro was a bad idea with the best intentions, and now the sensible course for all involved is to cut losses and return to the sanity of national currencies.