Greece’s Prime Minister George Papandreou has called for a referendum on the newest EU bailout/austerity program forced on the country. This has caused a rebellion in his own party.

The austerity measures that were imposed with the past EU deals have been deeply unpopular with the Greek people, and polls show voters disapprove of this new deal. As a result world markets are panicking based on the assumption the Greeks will vote against the deal. The Euro value has fallen (usually a good thing for them to help their exports) and all over the world stock markets are down sharply.

No one knows if the referendum will even happen, whether it will fail or what will happen if it does.  It could potentially have huge implications for the economy of Europe. Paul Krugman thinks this referendum could be part of the beginning of the end of the Euro currency union as it’s currently structured. The reaction of world markets shows he is not the only one to think that way.

While I suspect in the long term Greece and other parts of Europe would be better off without the unworkable structure of the Euro, in the short term any chaos or prolonged uncertainty about a possible break up of the currency union seems likely to cause further economic downturn on the Continent.

For the Obama campaign though, what matters is how the US economy is going in the short term. Presidential elections are heavily based on the state of the economy. Obama’s job approval numbers have been slowly moving up thanks in part to a modest improvement in economic optimism.  But if economic turmoil hits Europe’s economy over the next few months, a contraction there could easily spill across the Atlantic and destroy the very modest growth the American economy might otherwise see. A crisis in Europe, a huge trading partner of the United States, could end up pushing the US unemployment rate back up.

A no vote in Greek could finally force Europe into the crisis it had been kicking down the road for years.  A terrible economy in Europe could drag down the American economy, producing such bad economic conditions here  that it would be almost impossible for an incumbent president to win re-election.

It is possible a large part of Obama’s political success or failure may soon rest thousand of miles away with the voters in a small Mediterranean country, but only because years of total failure by European elites finally brought their continent to this brink.