As worst euro fears fade, US fiscal cliff looms



REUTERS

Published — Wednesday 26 September 2012

Last update 26 September 2012 5:49 pm

| نسخة PDF Print News | A A

LONDON: The euro zone has stepped back from the brink of disaster for now, but the global economy could soon be staring into another abyss if US politicians fail to head off $ 600 billion in automatic austerity that all but guarantees a new recession.
The long-term fate of the single currency remains unclear, but nerves have calmed since the European Central Bank promised on Sept. 6 to act as the buyer of last resort for Spanish and Italian bonds.
Now, exactly six weeks before the US general election, fiscal gridlock in Washington is coming back on the global economy’s risk radar.
If opinion polls hold steady and prove accurate, US President Barack Obama, a Democrat, will defeat Republican Mitt Romney on Nov. 6. The House of Representatives is likely to stay in the hands of the Republicans, who have a chance of seizing control of the Senate.
On the surface, with power split, that could make it harder to avert $600 billion in spending reductions and expiring tax cuts, equal to 4 percent of gross domestic product, that will kick in at the start of 2013 unless a deal is struck to shrink the US budget deficit by at least $1.2 trillion over the next decade.
“The level of political partisanship in Washington is higher than it’s ever been, and that it is making it much harder to deal sensibly with some of the economic and other problems America is facing,” said Xenia Dormandy, a senior fellow at Chatham House, a think tank in London.
“The American system is designed to have checks and balances and that’s what’s happening. But it does mean that in times like this, when strong responses are needed, they’re not forthcoming,” she added.
The consensus among US and other politicians, policymakers and businessmen at a recent conference organized by Oxford Analytica, another research group, was that Washington would avoid plunging off the fiscal cliff — or at least falling all the way down.
But some were downright pessimistic that the political gulf could be bridged any time soon, with potentially ominous consequences for America’s growth and credit rating.
One European economist said he feared America as a whole was becoming like California — a dynamic economy suffering from political sclerosis.
“The dysfunctionality of democracy in the United States is the most important problem America faces in coming years,” he said. To encourage a frank exchange of views, reporters were not allowed to identify the speakers at most of the conference sessions.
A North American former politician said the US political system had astonishing powers of renewal. Deadlock would not last forever.
But he said there was global disquiet that the logjam was preventing America from capitalizing on its strengths in high-technology, science and advanced manufacturing.
“Brinkmanship is no way to run public policy,” he said.
Tightening on the scale envisaged is unprecedented in recent US fiscal history, and US Federal Reserve Chairman Ben Bernanke has said the shock would imperil an already fragile economy. The Congressional Budget Office has warned of recession.
Indeed, slowly and quietly, Congress is groping for ways to dodge the cliff plunge by putting off its own deadline for most of the major year-end budget and tax decisions.
Compromise is also the scenario seen by a number of banks — though they do not rule out an initial, limited cliff dive to concentrate politicians’ minds.
Economists at Citi led by Nathan Sheets expect lawmakers to delay tax increases and to recast spending cuts, resulting in fiscal drag of about one percentage point and a relatively benign near-term growth outlook.
“Nevertheless, with general government debt already topping 100 percent, this leaves the US dangerously exposed to an abrupt loss of market confidence and a fiscal crisis as near-term debt continues to outrun GDP,” they said in a study.
HSBC reaches a similar conclusion. On a muddling through scenario of some austerity and debt reduction, fiscal tightening would amount to 1.1 percent of GDP in 2013.
But that would still leave the budget deficit in fiscal year 2013 at 6 percent of GDP, one of the highest on record, Kevin Logan, the bank’s chief US economist, said in a report.
The prospect of continued political polarization would seem to bode ill for the two candidates’ promise to promote trade.
But a former State Department official noted that Obama managed last October to push through a trio of free trade agreements with Colombia, Panama and South Korea that had been bogged down for four years.
“If we’re on stronger domestic ground we might see a flowering of free trade with bipartisan approval,” she told the Oxford Analytica conference.
On China, there was widespread skepticism that Mitt Romney would make good on his promise as president to punish China by declaring it a currency manipulator on his first day in office.
Doing so would antagonize a country that is the biggest holder of US Treasuries and is now America’s third-largest export market, after Canada and Mexico.
Between 2000 and 2011, US shipments to China rose 542 percent, while exports to the rest of the world rose 81 percent, according to Andy Rothman, an economist at CLSA in Shanghai.
Like Romney, Obama has been tough on China during the campaign, launching a World Trade Organization challenge against Beijing’s subsidies on autos and car parts.
The two candidates are attuned to public opinion: the Pew Center found 59 percent of Americans regard China as an economic threat compared with 45 percent of Europeans.
While 67 percent of Americans say that international business ties are good for the US economy, this was the lowest level of backing for trade among 21 countries surveyed by the Center in 2011. The figure in France, a sometimes ambivalent supporter of free trade, was 83 percent.
“None of this will necessarily translate into protectionist actions by the next administration that could inhibit world growth,” the Pew Center’s Bruce Stokes said in an analysis.
“But it does suggest that Washington’s offensive efforts to promote trade my be met with public skepticism, while defensive actions may find public support.”

What's happening around Saudi Arabia

JEDDAH: The Saudi man who carried out a suicide bombing at a mosque in Kuwait on Friday had no previous convictions for terrorism, the Interior Ministry said.The ministry, through its Twitter account, announced that Fahad Suleiman Al-Gabbaa was born...
JEDDAH: Eight million people visited the Grand Mosque in the first 10 days of Ramadan, a 49 percent increase from last year, the Haj and Umrah Directorate said recently.Salah Saqr, director of the directorate, said the transport plan was approved and...
JEDDAH: The government has installed 5,000 high-definition cameras on all floors and courtyards of the Grand Mosque to ensure security and crowd control.These cameras are monitored 24 hours a day by officers at a control center in Mina. They have to...
GENEVA: Saudi Arabia has welcomed the report of the International Fact Finding Commission on Israeli aggression in Gaza and has lauded its effort to prepare the report despite noncooperation from Israel which did not allow the committee to do its wor...
JEDDAH: Several Yemenis have praised the government for correcting their status quickly, which created no extra burden while fasting.Many who gathered in front of the Passport Department in Asir said everything was in place for them, a local newspape...
RIYADH: The $11.6 billion King Abdullah Financial District (KAFD) is already being admired for being a smart city but nobody can tell when it will be completed.“Being a smart city, everything is state-of-the-art. There is seamless Internet access and...
RIYADH: In a new move, the Ministry of Health will conduct drug tests on all drivers ferrying pilgrims between Makkah and Madinah during the Haj season.The decision was taken at a Haj preparatory meeting held on Sunday under the chairmanship of Imad...
JEDDAH: Motorbikes are among the most important means of transportation in Makkah during Ramadan because they are easy to use and cope easily with congestion in the central area next to the Grand Mosque. Despite the presence of public transportation,...
JEDDAH: A local man here runs a business started 150 years ago by his grandfather making sought-after Hijazi sweets for Eid and other festivals.Samer Jastaniah, 35, has three family shops making these products. “I am the grandson of the doyen of swee...
RIYADH: Saudi students have won six medals — a gold, a silver and four bronze — at the 19th Junior Balkan Mathematical Olympiad (JBMO 2015), securing the fifth place for the nation, as against 13th in its first participation in 2013.Rinad Abu-Jamal f...
Ambassador of Belgium Geert Criel:— Which particular aspect of Saudi Arabia you like the most? The friendliness of its people.— What is your favorite and oft-repeated Arabic word? Ahlan wa Sahlan.— Which book is by your bedside these days? World Orde...
AL-AHSA: Saudi farmers here need more support to buy fertilizers, medicines and equipment, and market their products.This is the view of Ahmed Al-Musalmi, who recently won the country’s ‘Ideal Farmer Award.’ He said high production costs and low mark...
JEDDAH: The Commission of the Promotion of Virtue and Prevention of Vice (Haia) has launched 20 initiatives aimed at improving the professionalism of employees and limiting individual interpretations and actions while carrying out duties.Sheikh Abdul...
RIYADH: Medical studies and research for new methods in the treatment of chronic diseases suggests that fasting could help combat cancer and boost effectiveness of treatment.Scientists doing research on the positive aspects of fasting discovered that...
RIYADH: The Ministry of Education has announced that Saudi universities would accept 95 percent of high school graduates, despite a royal decree four years ago setting a ceiling of 70 percent.The royal decree had approved the “Afaq Project,” a strate...

Stay Connected

Facebook