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eyes on the U.S.

Why The US Recovery - And Obama's Hopes - Depend On Good News From Europe

Analysis: It's morning again in America -- for now. Obama's odds on a second term have gotten a boost by good economic news. But the U.S. recovery is linked to the situation elsewhere, notably in downtrodden Europe, still the top consume

Monti and Obama last week at the White House.
Monti and Obama last week at the White House.
Francesco Guerrera

The United States is witnessing a perfect storm of job creation and economic growth. An unexpected mix of low wages, companies with surplus cash and consumers ready to spend again is simultaneously boosting the world's largest economy, offering oxygen to the markets and increasing President Barack Obama's chances of reelection in November.

But without Europe, the storm will not be truly perfect. The U.S. and its president must hope that the relaunch of their economy will not be stopped abruptly by a disastrous crisis or political gridlock. Last week, Obama spoke warmly about European leaders and expressed his great esteem for Italian Prime Minister Mario Monti, who was paying his first visit to Washington as Italian prime minister. The American president's words, however, were also strategic.

In a globalized world, no country is an island. The United States and Europe have deep commercial relations. They are indivisible partners. Of course, their current economies are different: the U.S. is growing, while Europe is sliding back into recession. The U.S. is looking ahead, with tech companies such as Facebook, Google, and Apple. Europe is licking its wounds and facing joyless years of austerity to get its budgets into order.

Nonetheless, the relationship is symbiotic. The American recovery will transform into substantial growth only if Europe manages to avert the worst-case scenario and begin again to buy products and services "Made in the U.S.A."

American numbers are not bad at all. In the last quarter of 2011, GDP rose by 2.8%, the best performance in the last year and a half. Treasury Secretary Timothy Geithner recently said that in 2012 GDP may rise by 3 percent. Of course, it is not at the levels of China or India, but it is indeed much better than Italy or Greece.

The most important data for the White House, though, is the unemployment rate, which has been the Achilles heel of the American economy and Obama's reelection chances. Republicans, and especially frontrunner for the nomination, Mitt Romney, have focused their attacks on Obama around job creation.

But good news arrived last week on this front as well. In January, the unemployment rate dropped to 8.3%, the lowest level during Obama's administration. Over the last five months, the unemployment rate has declined. Analysts predict this trend will continue. This could be crucial for Obama, who will need to win votes in the manufacturing areas of the Midwest, and in the southern states where jobs have vanished in recent decades.

Local recovery, global doubts

During a recent visit to a fire station in Virginia, Obama declared that "the recovery is speeding up" and that, "we can't go back to the policies that led to the recession."

Still, Obama's beautiful rhetoric will be futile if the recovery slows. This is why Europe matters. Much of the good news for the U.S. economy was local. Right now, the companies that have done most of the hiring recently are the local ones: in restaurants and bars, health care, and professional service sectors.

The manufacturing sector, which is one of the main engines of the U.S. economy, has not been part of the recent success. Companies that provide goods instead of services have retrieved just 400,000 of the two million job posts that have been lost since the beginning of the crisis.

Within the manufacturing industry, companies that have done better are those operating on the domestic market. This is the case for Detroit auto giants, which had been written off in 2007-2008.

Chrysler's commercial that aired last Sunday during the halftime of the Super Bowl was the best symbol of Detroit's recovery. Actor Clint Eastwood said in his husky voice, "It's halftime, America. Our second half is about to begin."

But the results don't depend only on America. To keep growing and to reduce unemployment, the U.S. needs to be able to export to Europe, given that Asia doesn't buy as many western products.

But as of now, Italian, Spanish, French and even German consumers are not ready to spend. The economic crisis is forcing governments to introduce austerity measures, and individuals are saving their euros.

This is the transatlantic dilemma. The feel-good factor -- where confidence leads to consumption -- that is driving the recovery in the U.S., is absent in depressed and worried Europe. The perfect storm has yet to cross the Ocean.

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