May 2012: Barack Obama is warned before the Camp David G-8 summit that the financial maelstrom seizing Europe could turn out even worse. If much of Europe slides back into double-dip recession, as Britain has done, millions of Americans will be smacked hard, from Toyota workers in Kentucky to lettuce pickers in sunny California. And almost certainly, Mr. Obama will have turned over the keys to the White House come next January to the “vulture capitalist” Mitt Romney.

Here is the dreadful scenario that growing numbers of analysts fear: Long lines of Greeks, Spaniards and Portuguese pound on bank doors demanding to pull their money out before it is replaced by devalued drachmas, pesetas, escudos. Long-suffering Greek voters fail on June 17 to elect political parties that can form a governing coalition, and Greece takes a messy exit from the Euro. Europe’s already faltering financial system then collapses, sending the entire world into a long-lasting global depression for the new President Romney to tackle.

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Unfortunately, Angela Merkel’s still playing Dr. No.

At a euro zone summit on Wednesday, the new French leader plans to revive proposals for bonds that would be jointly issued by euro zone countries to spread national debt burdens across the whole currency bloc.

Hollande knows however that there is little chance the German chancellor will warm to the idea, even faced with the mounting concern that, without drastic action, the euro zone is headed toward a disastrous breakup.

“We spoke about it and both sides confirmed their well-known positions,” said France’s Finance Minister Pierre Moscovici, after meeting with his German counterpart on Monday to prepare the summit.

“Francois Hollande plans to put everything on the table … even those proposals that cannot be agreed immediately,” Moscovici added.

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Persistent political divisions — neatly bridged by a Group of Eight summit statement that advocates a mix of austerity and growth promotion — and lack of money stand in the way of a comprehensive European growth strategy. Analysts said markets were likely to look past the verbal deal, with news about Greece's struggle to stay in the eurozone and an informal European Union summit Thursday in Brussels more likely to set the tone.

At Saturday's G-8 summit, German Chancellor Angela Merkel — under urging from U.S. President Barack Obama and French President Francois Hollande — signed onto a statement that called for mixing painful cutbacks with growth-promoting measures to deal with a crisis that threatens the global economy.

The leaders warned that budget deficits have to come down. But they also acknowledged that an approach that's based mostly on austerity and longer-term reforms can't help countries out of recessions this year or next. That's the approach that has dominated the continent's German-led attack on the crisis since it erupted in late 2009, when Greece admitted its finances were broken.

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The new parliament will hold power just one day because the election left no party with enough votes to form a government, forcing repeat elections next month. Recent polls show falling support for Golden Dawn, so it's not certain to make it into parliament again. Still, many people across Europe are troubled.

"The Golden Dawn party is a dark stain on European politics," said Moshe Kantor, president of the European Jewish Congress. "For the first time in over six decades a seemingly long hidden Nazi ideology returned to power."

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First, leaders of eight wealthy democracies gather at Camp David on Friday and Saturday for the annual Group of Eight meeting, where Europe's spiraling debt is Topic No. 1. Then, it's to Chicago for a NATO meeting. The alliance's troop withdrawal from Afghanistan and the European financial crisis will share the spotlight.

Europe's woes have a direct bearing on the U.S. economy and thus Obama's re-election prospects. American economic growth depends on the success of the 27-nation European Union, a bloc that is America's biggest trading partner.

The outlook is gloomy, with prospects of a Greece collapse looming and eight of the 17 eurozone countries mired in recession.

Republican presidential contender Mitt Romney regularly accuses Obama of trying to transform the U.S. into "a European-style social welfare state." Obama is leading the nation down the same path as Greece, Romney says, a claim he's likely to expand as Greece's banking crisis deepens.

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Very rich.

During the 2008-2009 financial meltdown, Goldman Sachs and hedge fund tycoon John Paulson hauled in billions betting against mortgage-backed securities. Likewise, the financial nerds profiled in Michael Lewis' "The Big Short" cashed in, big time.

And this is nothing new.

Before the UK's 1994 Black Monday crash, financier-philanthropist George Soros, sensing central bankers with their heads in the sand, made billions shorting the pound sterling — essentially borrowing the currency, selling it, and later paying back his creditors when he could buy it cheaper. He successfully repeated this trick as Southeast Asia went into crisis in 1997.

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In the last few days, however, the risk that Greece could be forced out of the currency bloc has become too real to be ignored. The once-taboo subject has become an unavoidable topic of conversation among Europe’s financial leadership.

“The price would be very high if they decided to leave the euro,” warned German Finance Minister Wolfgang Schauble, before talks Monday with his eurozone partners.

Governors of three central banks have openly raised the option of a Greek exit.

“Technically it could be managed,” said Patrick Honohan, the Irish governor. “It is not necessarily fatal, but it is not attractive.”

Even Jose Manuel Barroso, the usually cautious president of the European Commission, had a stark warning for the Greeks: “If a member of a club does not respect the rules of the club, it’s better not to remain in the club,” he told Italy’s Tg24 TV last week.

In the corridors of the European Union’s headquarters the fear now is not only that Greece could be forced out, but that the resultant chaos would spread quickly to Portugal, Ireland, Spain and beyond, causing a collapse of the euro currency and a generalized economic meltdown.

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The debate can be confusing, especially for Americans. Even as Merkel insists on cost cutting, her economic team rushes to explain that Germany has always been pro-growth. Well, maybe, but Merkel’s “growth” more likely means wasting Greece, Ireland, Portugal, Spain and France. Hollande, a one-time professor of political economy, understands this as he preps for the grip of Madame Merkel’s open arms. He knows that she will try to smother him with her much-loved Treaty on Stability, Coordination and Governance, which would press thorny sanctions on any country that fails to hold its deficits below 3 percent of gross domestic product. This fiscal compact, drawn up by Merkel and Hollande’s defeated predecessor Nicolas Sarkozy, mandates harsh spending cuts that would further deflate the continent’s already weak economies, boost  unemployment, agitate unrest, reduce GDP and thereby increase everyone’s debts and deficits — including very likely her own.

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Britain’s Office for National Statistics confirmed on Wednesday that in the first quarter of this year Britain’s economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage equal a recession.) On Monday, Spain officially fell into recession for the second time in three years. Portugal, Italy and Greece are already basket cases, and it seems highly likely France and Germany are also contracting.

Why should we care? Because a recession in the world’s third-largest economy (Britain), combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest.

Remember – it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed in a global capital network extending from Frankfurt to Beijing. That means that, notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they’ve been at any time since 2007.

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Spanish flu spread around the world in the early 1900s. The pandemic didn't begin in Spain, but it was there that the world realized how serious — and unstoppable — the outbreak had become.

Now, as Spain takes up a central position in Europe's economic crisis, the analogy is clear.

Sickly economies in Greece, Portugal and Ireland may yet respond to the European Union’s limited array of economic remedies.

But if Spain’s attempt to heal itself with a shock-treatment of austerity fails, the EU may not be strong enough to prevent the infection from spreading to Italy, France and beyond.

“The big question is, can Europe ring-fence Spain, can they draw a line to stop this contagion happening? This is their biggest challenge,” says Carsten Brzeski, senior Brussels economist at the Dutch bank ING.

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In the past two weeks, the seemingly endless prophesies of doom for the European economy have fallen eerily silent.

European stocks climbed to an eight-month high Friday, pressure is easing on Italian bonds, Greece has disappeared from front pages.

“The world economy has stepped back from the brink,” Christine Lagarde, head of the International Monetary Fund, told an audience in Beijing over the weekend. “We have cause to be a little bit more optimistic.”

The immediate risk of catastrophe has receded, but the euro zone is far from finding its way out of the woods — and the big bad wolf of currency collapse is still lurking among the trees.

Behind the cautious optimism lie several worrisome possibilities.

Portugal might still be forced into a Greek-style default. Greece could still backslide after its impending elections. The frontrunner in France’s presidential election wants to pick apart new rules on fiscal discipline.

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Many EU countries are being forced to follow a strict austerity path to slash their debts, but these measures seem to be sapping their ability to grow their economies and create jobs.

Some analysts warn that in the absence of measures to boost growth, more bailouts and debt write-downs could be in the cards.

The latest figures are certainly worrying.

The euro-zone economy contracted by 0.3 percent in the fourth quarter of 2011, the EU's statistics office Eurostat confirmed on Tuesday, and unemployment reached an average of 10.7 percent in January, the highest since the euro was introduced in 1999.

That figure masks the huge discrepancies within the bloc. For example, while Spain’s unemployment is now at 22.9 percent, Austria’s is only 4 percent.

Most attention recently has focused on the drama in Greece, which has required a second bailout in two years to keep from defaulting on its debts.

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Greece and its euro zone partners saved their marriage by agreeing on a $170 billion bailout, but it hasn’t squashed talk of a messy breakup.

Some analysts see a Greek debt default as inevitable. Even Greece’s lenders fear the program is “accident prone,” as they said in a report for euro zone finance ministers before they approved Tuesday’s bailout.

It’s far from a universal opinion. Greek leaders lauded the agreement, naturally, saying it saved the country from a chaotic default. Others add that Greeks — despite the occasional violent protest against austerity measures — grudgingly accept that reforms are necessary.

Still, more of the same won’t cut it, said Costas Michalos, president of the Athens Chamber of Commerce and Industry.

“It’s a bad rescue package,” he said. “It’s not the right mixture of economic policies. If we follow the same economic policies of the past two years, there will be no other option than default, which I’m sure no one wants.”

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Now all it has to do is help the country pull out of a five-year recession, get the one-in-five unemployed Greeks back to work and make sure that Portugal, Ireland, Spain and Italy don't end up sharing a similar fate.

Tuesday's agreement among euro zone finance ministers came after another tense bout of all-night negotiations at the end of months of bickering between Brussels, Berlin and Athens on whether the Greek government could be trusted to make good on austerity pledges given in return for the rescue funding.

"In the past two years and again tonight, I've learnt that marathon is indeed a Greek word,” said the EU's Economic Affairs Commissioner Olli Rehn. “But in the end we came to an agreement."

The deal is certainly a major achievement in the battle to get both Greece and the whole of the euro zone out of their economic mess. But nobody has any illusions that the euro zone is anywhere near the finishing line of its long-distance race to get out of the economic hole.

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Back then, French President Nicolas Sarkozy intoned that “Laissez-faire is finished. The all-powerful market that always knows best is finished.”

“Anglo-Saxon capitalism,” as the deregulated U.S. and British variety is called on the continent, “was as simple as it was dangerous,” declared Germany’s finance minister at the time, Peer Steinbruck. “The world will never be as it was before the crisis.”

Today, it may be tempting for Americans to believe that Der Schuh is on the other Fuss. That would be delusional. For as complex and uniquely European as the current turmoil “over there” may be, the euro zone sovereign debt crisis holds important lessons that the United States ignores at its own peril.

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Crucially, the leaders of all 17 euro zone countries concluded that the only way to fix the euro's flaws is by establishing a fiscal union that includes centralized control of national budget deficits.

But Britain will not be part of the negotiations defining the new fiscal union, setting the stage for a two-tier Europe.

Britain’s opt-out is a monumental development for Europe, and a significant defeat for Prime Minister David Cameron.

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German Chancellor Angela Merkel and French President Nicolas Sarkozy will be in the spotlight, attempting yet again to forge a robust solution to the euro zone’s debt crisis. They have proposed bold changes to the way the euro zone governments spend money, with tough oversight they hope will ensure fiscal stability. The French president has tried to speak convincingly of guaranteeing “the future of Europe.”

If successful, the leaders will be hailed as saviors. But will this really be their finest hour? Will they finally manage to achieve the overarching goal of restoring confidence in the battered euro, saving Europe and the world from another devastating recession?

Many political observers are pessimistic. For nearly two years, summit after summit has failed to produce a solution, in large part because of weak leadership, they argue. Unlike the towering visionaries who created the common market and its currency, Merkel and Sarkozy just don’t seem to be up to the task, they say.

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Many European leaders are advocating this as well. The problem: Germany is resolutely opposed to this.

The stakes could hardly be much higher. Forget about tiny Greece, Portugal and Ireland. Italy, the zone’s third largest economy, owes $2.55 trillion. It will have to refinance a staggering $530 billion next year alone, and investors are currently demanding unsustainable rates, in excess of 7 percent. Meanwhile, France’s interest rates are rising, and ratings agencies are threatening its AAA status. Even Germany — the continent’s economic powerhouse — is having trouble financing itself.

Fear is mounting that Europe’s debt crisis could rage out of control, ultimately causing the breakup of the currency union or worse.

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As we move further into the fourth year of the global financial crisis, the questions of where it will end are becoming ever more insistent. When will political leaders finally come up with a solution? When will the atmosphere of dread and panic subside? Put most simply, when will life get back to normal?

There have been recessions before. Unemployment has risen, government revenues have dropped, but after a couple of years some combination of economic policy and new consumer demand has turned the tide and Western democracies have reverted to politics as usual, with parties of the left and right arguing over the distribution of social goods within their own countries. Why isn't that happening again?

There are plenty of answers that speak to the immediate causes: the economic stimulus packages on both sides of the Atlantic have been too small to restart substantial growth; the European Union bureaucracy has been dysfunctionally slow to respond; the euro zone lacks a process for countries to give up the currency.

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