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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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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That was made evident yet again on Sunday when her conservative Christian Democrats (CDU) suffered their worst ever result in Germany’s most populous state of North-Rhine Westphalia. The party only managed to get just over 26 percent of the vote in the snap election, shedding almost 9 points since securing 35 percent in the last vote there in 2010.

Her junior coalition partners the Free Democrats did manage an impressive comeback, securing a surprise 8 percent and managing to return to the state parliament thanks to its dynamic leader in the state, Christian Lindner. However, the disastrous performance by the CDU will allow the Social Democrats and Greens to form a stable coalition, after operating as a minority government for the past two years.

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While workers in many other countries fear for their jobs as their economies tumble into recession, here newly confident labor unions are demanding massive pay rises — and going on strike to get them.

On Wednesday around 30,000 workers in Germany’s vital manufacturing sector downed tools in a coordinated action that affected over 100 companies, including Daimler and Bosch. The strikes continued on Thursday with an estimated 115,000 workers staging a walk out in around 400 companies, including Porsche and Audi, as part of industrial action to secure a hefty 6.5 percent pay rise forGermany’s 3.6 million metalworkers.

Yet, while some workers in troubled countries may look with envy at their German comrades’ brazenness, in fact the action taking place from Berlin to Bavaria could end up being to the benefit of workers in Madrid, Athens or Lisbon.

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“When I started out, any mother would have been happy for their daughter to marry a waiter,” he says, speaking at the back of the restaurant in central Madrid where he is maitre d’. Castellanos, 58, a stocky, jovial man, with a quickness of thought honed by decades on the job, remembers how common it was a couple of decades ago to find good waiters who combined cordiality, calmness, efficiency and the intelligence needed to read a client’s mind — all appealing traits to a potential mother-in-law.

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There’s a new buzz in Brussels about pumping hundreds of billions into a Marshall Plan-inspired fund to get Europeans back to work, devaluing the euro to boost exports or sharing out the euro-zone debt burden.

“This generalized austerity is prolonging the crisis. I can’t accept that. We need growth in Europe,” says Francois Hollande, the Socialist leader tipped to win Sunday’s French presidential election.

“With every day that goes by, I have the feeling that my initiative is more and more understood in Europe,” Hollande said in comments posted on his website Monday.

Hollande is enjoying an eight-point lead over incumbent Nicolas Sarkozy in opinion polls ahead of Sunday’s vote. His expected victory is the main catalyst behind the emerging pro-growth emphasis in Europe, but there are other factors.

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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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The German chancellor had announced she'd campaign in France to secure the reelection of President Nicolas Sarkozy, her sidekick in drawing up the continent-wide belt-tightening plan designed to pull the eurozone out of its debt crisis.

That never happened, despite lingering German fears that Sarkozy's main challenger Francois Hollande risks undermining Merkel's European fiscal discipline pact by embarking on an old-fashioned Socialist spending spree.

In the end, Sarkozy's advisors decided he'd do better by distancing himself from Merkelian austerity and focusing instead on tried-and-tested vote winners in France, like getting tough on immigration and erecting protectionist barriers against China and other perceived villains of globalization.

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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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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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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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Economists say it could throw the world back into the kind of crisis that reached its nadir in 2008 and 2009, destroying trillions of dollars in wealth and causing millions to lose their jobs.

In the euro zone mess, so far the U.S. has largely played the role of an outsider, reiterating the urgency of dealing with the mess. On Tuesday, for example, the U.S. Federal Reserve's second-in-command Janet Yellen urged European leaders to take "forceful action."

But now a respected Washington economic policy shop is saying that Yellen's bank itself should get involved directly. The Center for Economic Policy and Research (CEPR) is calling on America's central bank to become a lender of last resort for the heavily indebted nations, to reduce their interest rates from unsustainable levels — Italy, Europe's third largest economy is paying over 7 percent for its debt, a level at which other countries have required bailouts.

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But the escalating euro zone crisis is jeopardizing that accomplishment. The West African island nation’s top trading partners? Portugal and Spain.

Contagion – meaning collateral damage from direct or indirect exposure to the problem – is not just a euro zone headache. Much of the world is linked through financial markets and trade. The danger is investors run to safe havens, economies shrink, and unemployment rises. The U.S., China and India have all weighed in on its perils. U.S. states have reason to be concerned about the local impact.

Even tiny countries like Cape Verde, with populations of a half-million can’t escape, as they confront lower demand for exports and less foreign investment.

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Trade data reported on Thursday indicated the U.S. also sold a record amount of exports to the rest of the world in October -- proof that we are making things that the rest of the world wants to buy. That's good news for the U.S., and conceivably, for the White house. Even though at this point in the political cycle, it may already be too late to change voter perceptions of the economy, it certainly won't hurt Obama's prospects for reelection if the economic situation steadily improves over the next 12 months.

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Until recently, European politicians didn’t publicly acknowledge that any nation might abandon the currency. But late last week, Luxembourg's Prime Minister Jean-Claude Juncker said, "We would like Greece to remain a member, but we’re not saying Greece has to stay a member at all costs."

This was followed by the news that TUI, Germany's largest package-tour operator, sent a letter to Greek hotels requesting that they accept payment in drachmas in the event that Greece is forced to return to its old currency.

With Greek politics in turmoil since last Monday, when then-Prime Minister George Papandreou called for a referendum related to the euro zone bailout, sources in the European Commission acknowledge that contingency planning is underway for a possible Greek exit from the euro.

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