NEW YORK – Europe has been in a financial crisis since 2007. When the bankruptcy of Lehman Brothers endangered the credit of financial institutions, private credit was replaced by the credit of the state, revealing an unrecognized flaw in the euro. By transferring their right to print money to the European Central Bank (ECB), member countries exposed themselves to the risk of default, like Third World countries heavily indebted in a foreign currency. Commercial banks loaded with weaker countries’ government bonds became potentially insolvent.

There is a parallel between the ongoing euro crisis and the international banking crisis of 1982. Back then, the International Monetary Fund saved the global banking system by lending just enough money to heavily indebted countries; default was avoided, but at the cost of a lasting depression. Latin America suffered a lost decade.

Germany is playing the same role today as the IMF did then. The setting differs, but the effect is the same. Creditors are shifting the entire burden of adjustment on to the debtor countries and avoiding their own responsibility.

The euro crisis is a complex mixture of banking and sovereign-debt problems, as well as divergences in economic performance that have given rise to balance-of-payments imbalances within the eurozone. The authorities did not understand the complexity of the crisis, let alone see a solution. So they tried to buy time.

Usually, that works. Financial panics subside, and the authorities realize a profit on their intervention. But not this time, because the financial problems were combined with a process of political disintegration.

When the European Union was created, it was the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the EU into something fundamentally different, dividing member countries into two classes – creditors and debtors – with the creditors in charge.

As the strongest creditor country, Germany has emerged as the hegemon. Debtor countries pay substantial risk premiums for financing their government debt. This is reflected in their cost of financing in general. To make matters worse, the Bundesbank remains committed to an outmoded monetary doctrine rooted in Germany’s traumatic experience with inflation. As a result, it recognizes only inflation as a threat to stability, and ignores deflation, which is the real threat today. Moreover, Germany’s insistence on austerity for debtor countries can easily become counterproductive by increasing the debt ratio as GDP falls.

There is a real danger that a two-tier Europe will become permanent. Both human and financial resources will be attracted to the center, leaving the periphery permanently depressed. But the periphery is seething with discontent.

Europe’s tragedy is not the result of an evil plot, but stems, rather, from a lack of coherent policies. As in ancient Greek tragedies, misconceptions and a sheer lack of understanding have had unintended but fateful consequences.

Germany, as the largest creditor country, is in charge, but refuses to take on additional liabilities; as a result, every opportunity to resolve the crisis has been missed. The crisis spread from Greece to other deficit countries, eventually calling into question the euro’s very survival. Since a breakup of the euro would cause immense damage, Germany always does the minimum necessary to hold it together.

Most recently, German Chancellor Angela Merkel has backed ECB President Mario Draghi, leaving Bundesbank President Jens Weidmann isolated. This will enable the ECB to put a lid on the borrowing costs of countries that submit to an austerity program under the supervision of the Troika (the IMF, the ECB, and the European Commission). That will save the euro, but it is also a step toward the permanent division of Europe into debtors and creditors.

The debtors are bound to reject a two-tier Europe sooner or later. If the euro breaks up in disarray, the common market and the EU will be destroyed, leaving Europe worse off than it was when the effort to unite it began, owing to a legacy of mutual mistrust and hostility. The later the breakup, the worse the ultimate outcome. So it is time to consider alternatives that until recently would have been inconceivable.

In my judgment, the best course of action is to persuade Germany to choose between either leading the creation of a political union with genuine burden-sharing, or leaving the euro.

Since all of the accumulated debt is denominated in euros, it makes all the difference who remains in charge of the monetary union.If Germany left, the euro would depreciate. Debtor countries would regain their competitiveness; their debt would diminish in real terms; and, with the ECB under their control, the threat of default would disappear and their borrowing costs would fall to levels comparable to that in the United Kingdom.

The creditor countries, by contrast, would incur losses on their claims and investments denominated in euros and encounter stiffer competition at home from other eurozone members. The extent of creditor countries’ losses would depend on the extent of the depreciation, giving them an interest in keeping the depreciation within bounds.

After initial dislocations, the eventual outcome would fulfill John Maynard Keynes’ dream of an international currency system in which both creditors and debtors share responsibility for maintaining stability. And Europe would avert the looming depression.

The same result could be achieved, with less cost to Germany, if Germany chose to behave as a benevolent hegemon. That would mean implementing the proposed European banking union; establishing a more or less level playing field between debtor and creditor countries by establishing a Debt Reduction Fund, and eventually converting all debt into Eurobonds; and aiming at nominal GDP growth of up to 5%, so that Europe could grow its way out of excessive indebtedness.

Whether Germany decides to lead or leave, either alternative would be better than creating an unsustainable two-tier Europe.

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The love fest of the political convention season ended almost as soon as it began, when the first prime-time speaker, House Speaker John Boehner, set a Republican agenda that "starts with throwing out the politician who doesn't get it, and electing a new president who does."

Since then, the two parties have launched into a brawl in which few rules apply, and flame-throwing and facile lies are standard gear.

The loser could well be you and your stock portfolio over the next two months.

Much of the heated rhetoric will consist of Republican claims that President Obama mishandled the economy or Democrats saying how they believe Mitt Romney's programs would hurt people more.

In that kind of environment, investor confidence, already low, could sink further, say some analysts.

Fund company T. Rowe Price said in its recently monthly report, "investors are focused on an apparently never-ending eurozone crisis and the campaign rhetoric emanating from both major political camps in the U.S."

Good-time elections now history. Historically, election years have been good times for investors. But over the past five elections, the Dow has fallen an average of 3.72 percent, and declined in four out of five September-to-November election day periods.

"The past several presidential elections, and politics in general, just keep getting more nasty," says Tyler Vernon, chief investment officer and co-founder of Biltmore Capital Advisors in Princeton, N.J. "It's not the way things were 25 years ago. Over the past few cycles, it has become much more negative. With Democrats and Republicans, the attack ads are questioning leadership more and more. It hurts investor confidence."

The perception that advertising is growing more negative is borne out by numerous studies. A recent one by the Wesleyan Media Project showed negative ads rising by a staggering amount—accounting for 70 percent of all presidential advertising in the early few months of this year, compared with just 9 percent in the 2008 period (although other factors, including fewer positive ads run by groups supporting Obama in this cycle, caused some of that shift.)

The big difference over the past four years is that so-called Super PACs have been freed from spending limits, or even listing contributors, and the Big Money advertising has been overwhelmingly negative, the Wesleyan study showed.

Politicians have always had a penchant for painting a negative picture of their opponents—some remember President Johnson's vivid black-and-white television ad showing a girl picking a flower as a nuclear mushroom cloud appeared behind her, a slap against his opponent Barry Goldwater's strident anti-Communism, or George H.W. Bush's ads accusing Massachusetts governor Michael Dukakis of furloughing a convicted murderer, Willie Horton, who embarked on a violent crime spree.

Those negative campaigns, though memorable, were not the norm. The LBJ ad was quickly withdrawn. And ads were often about "finding prosperity," rather than slamming the economy, Vernon says. From 1900 to 1988, the market scored nearly twice as many gains as losses in the September-through-November election span. The Dow gained in 15 of the years and declined in eight. The average September-to-election gain was 1.7 percent, exactly in line with the average gain for all two-month periods since 1900.

Impact of financial crisis. The most recent election losses can be blamed at last partly on the crash of 2008, which was an election year event, although election years of the past also had some ugly Octobers, including the 1932 pre-election period in which stocks plunged 20 percent.

But the rising importance of the economy as an election factor and a surge in negative advertising are also playing a critical role, studies show. It's not just your imagination; things really have gotten uglier since the days of Ike and Adlai, or even since Bill Clinton and George Bush the First.

The Google Ngram tool, which measures and displays keywords in publications going back to 1800, shows a dramatic "hockey stick" upswing in the term "negative political advertising" after 1988. It also shows the steady rise of the phrase "the economy" in the national dialogue. Social issues and foreign policy have faded, in relative terms.

The issue-oriented negative ads might be even more effective at swaying voters than obvious personal attacks, suggested one study by two Rutgers professors and one from George Washington, "The Effects of Negative Campaigning, A Meta-Analytic Reassessment." They saw significant potential for the practice to undermine public sentiment.

"When that happens, people spend less, they don't hire, they don't buy homes," says Vernon.

The focus on business issues likely reflects the fact that many of the Super PAC contributors are wealthy and tend to be most interested in issues affecting their financial standing. Supreme Court rulings in 1976 and 2010 affirmed a free-speech right to spend one's money on political campaigns without limit, freeing wealthy contributors and candidates of key post-Watergate campaign reforms. Many politicians began shunning matching funds to give them more fund-raising freedom.

What investors are doing. "A lot of people are just incredibly confused about the economy, and they are like deer caught in the headlights," says Vernon. "The campaign promises and attacks are not helping. There is always uncertainty about elections, but it is really magnified this time. The leadership, both Democrat and Republican, acts like they are in kindergarten when it comes to getting things done. They prefer to do things that are right for the party, not for the country," citing the near shut-down of the federal government over the disagreement on extending the debt ceiling.

Still, the market responds to influences well beyond the scope of any election, and there's no doubt it's been surprisingly strong in the August through early September period with the S&P returning to prerecession highs. But economic indicators, like the latest ugly jobs report, are still weak. "It's hard to get really excited about the market when all that really gets it going is the chance for easier Fed policy," says Vernon.

He is advising his own clients "to stay long, but stay hedged." He advises a balanced portfolio and a long-term view. Studies in the past have shown that the market does worst during the first two years of a presidential term, and tends to do better the second two years.

While stocks have performed poorly in recent pre-November periods, bonds have been generally stronger, gaining in price and offering steady yield.

"From now to the election, bonds will be a fairly good place to be," Vernon says. "People do not want to invest in riskier things when there is a high level of uncertainty. And there is a lot of that out there now."

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Zynga just announced a new title, Sports Casino, with a partner, RocketPlay.

The game lets you place bets with friends while watching live sports on TV.

Like Zynga Poker, you can only place virtual bets—you can't take your winnings out.

But this is still a big deal worth watching.

That's because:

• Real-money gambling is a big opportunity for Zynga, and this gets the company a little closer. Zynga can't do online gambling in the U.S., where it's illegal, but it can overseas, and it's said it wants to get into this market.

• RocketPlay's executive team comes from companies like BetFair. They have a lot of experience with online gambling.

• Zynga is starting to realize its ambition to become a publisher for third-party titles. Zynga's huge installed base, dedicated infrastructure, and experience with growing Facebook games is attractive to other game publishers. The fact that RocketPlay picked Zynga shows that Zynga's platform strategy is gaining momentum.

So all of that sounds great in theory. But it will only matter if it delivers bottom-line financial results, restarts Zynga's growth engine, and restores Wall Street's thoroughly battered faith in management.

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