Could Europe sink Obama's reelection bid?

Last week brought some good economic news for the country - and, by extension, President Obama's reelection team. The unemployment rate fell to 8.3 percent, thanks in large part to the country generating 243,000 new jobs in January. Unemployment has now fallen for five straight months, a sign that the economy may be recovering - slowly - from the depths of the recession.

The economic indicators are not unambiguously positive: The housing market continues to struggle, consumer confidence fell in January, and Federal Reserve Chairman Ben Bernanke says there is still "a long way to go before the labor market can be said to be operating normally." Indeed, there are no guarantees that the country's economic situation will continue to improve.

Still, there's no denying that recent economic trends are encouraging  -- just this morning, we learned the number of people applying for unemployment benefits was at a near four-year low. And with voters overwhelmingly citing the economy as their most important issue, that's a significant boon to Mr. Obama as he seeks a second term.

Mitt Romney, the Republican frontrunner, has cast the economic picture as gloomy as a result of the president's economic policies; that message becomes a much harder sell in a steadily improving economy. CBS News/New York Times polling is already showingthat more Americans are starting to see signs of life in the economy - and are crediting Mr. Obama for having made real progress in fixing it.

Lurking an ocean away, however, is a European financial crisis that has the potential to plunge the American economy into another serious recession. Which means that the biggest factor in whether Mr. Obama wins a second term may well be whether Europe finds a way to get out of the economic mess it now finds itself in.

The situation is not as complicated as you think. Here's what happened, in a nutshell: A number of European countries borrowed heavily in the form of government-backed bonds - also known as "sovereign debt" - which was largely financed by European banks. Many of these bonds were classified as low risk, and the banks were getting solid returns on their investment - so they bought a ton of them, effectively loaning far more than they should have to the countries in question. (For a sense of how much money we're talking about, consider this: About 1 trillion euros worth of European sovereign debt is maturing this year.)

The problem: Some countries - think Greece - now can't afford repay the loans, while others (I'm looking at you, Italy) are having a hard time paying the higher interest rate investors are demanding on new bonds they issue. If one or more of these countries is unable to pay its obligations and defaults, the European banks that bought up all their debt up could collapse - and bring the European economy down with them.

Why would that hurt the American economy? For starters, it would throw the interconnected worldwide economy into chaos, with huge - and somewhat unforeseeable - consequences, including a likely collapse of the stock market and the seizing up of the global financial system reminiscent of the Lehman Brothers bankruptcy of September, 2008. Then there's the fact that 22 percent of America's exports go to Europe - and if there economy collapses, so does that export market.

Another issue is that U.S banks have exposure to their European counterparts. According to the Congressional Research Service, U.S. banks hold bonds worth $1.2 trillion from German and French banks, along with $641 billion in bonds directly from the most at risk European countries: Portugal, Ireland, Italy, Greece and Spain. That's a potential $1.8 trillion-plus loss for U.S. banks that could destabilize the economy and make it harder for individuals, corporations and banks to do the borrowing that drives economic growth.

In Greece, the most at-risk of the at-risk European countries, officials seem to have reached agreement on a 130 billion euro ($172 billion) bailout packagethat seems to be the last, best hope for avoiding default in the short term. If that deal goes through, it should be enough to avert the potential disaster looming on March 20, when a 14.5 billion euro ($19 billion) bond payment comes due. Greece can't afford to make the payment without the bailout package.

But that's just one deadline, and it's not clear the bailout package is anything more than a short-term fix. 

"Even if Greece gets the money, it is still broke and hopeless," Constantine von Hoffman wroteon CBS MoneyWatch Thursday. "All that the cash will do is give Athens the money it needs to make the next round of payments on its debt."

If Greece (and the other at-risk countries) cannot get out from under their longer-term obligations, the European economy could still collapse this year.

"That could tip the world back into recession, and that would be lights out for the president," says Jill Schlesinger, Editor-at-Large for CBS MoneyWatch.

It's worth noting there are those who are skeptical that a European disaster would devastate the U.S. economy. Liberal economist Paul Krugman, for one, argues that it's "very questionable whether Europe's looming recession will actually have that much negative impact here." But most economists believe that a disaster for the European economy would mean a disaster for the American one.

So there you have it: It's entirely possible that the European debt crisis could plunge Europe into recession before November, in turn pushing America into recession and keeping Mr. Obama from winning a second term. In the 2008 campaign, then-candidate Obama saw a boost in the polls after Americans turned against the Republican presidential candidate, Sen. John McCain, in the wake of the financial crisis. This time around, the blame for an election-year recession would fall squarely on Mr. Obama's shoulders.