USA As Seen By Europe: The Next Greece?

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By now everyone knows how Americans feel about America: one quarter of the population (the half of the less than half that voted) is convinced the US is plunging into a socialist void that would make the USSR proud, another quarter of the population is furious at the wealthy and demands that they be taxed up the wazoo because "they didn't build that" but certainly profited from it, and is demanding wealth and income redistribution, while the silent majority is quietly picking up whatever pieces it can, and batting down the hatches, seeing very well, beyond the fog of bias and subjectivity, the inevitable epic deleveraging disaster, followed by even more epic printing that is coming this way. But how does the rest of the world see the US, especially now that the fiscal cliff (and the much less discussed debt ceiling debate: why, we don't know - it was "merely" the debt ceiling that led to a 20% drop in 2011). Yesterday, German financial media Spiegel provided a glimpse into just how Europe, which is knee deep in it as well, sees America. The verdict: the next Greece.

From Spiegel:

The US has more in common with heavily indebted southern European countries than it might like to admit. And if the country doesn't reach agreement on deficit reduction measures soon, the similarities could become impossible to ignore. The fiscal cliff looms in the near future, and its not just the US that is under threat.

The US has finally voted and the dark visions of America's future broadcast on television screens across the country -- and most intensively in battleground states -- have come to an end. Supporters of both Barack Obama and Mitt Romney had developed doomsday scenarios for what would happen if their candidate's opponent were to win. Four more years of Obama, the ads warned, would result in pure socialism. A Romney presidency would see the middle and lower classes brutally exploited.

But following Obama's re-election, Americans are now facing a different, much more real horror scenario: In just a few weeks time, thousands of children could be denied vaccinations, federally funded school programs could screech to a halt, adults may be forced to forego HIV tests and subsidized housing vouchers would dry up. Even the work of air-traffic controllers, the FBI, border officials and the military could be drastically curtailed.

That and more is looming just over the horizon according to the White House if the country is allowed to plunge off the "fiscal cliff" at the beginning of next year. Coined by Federal Reserve head Ben Bernanke, it refers to the vast array of cuts and tax increases which will automatically go into effect if Republicans and Democrats can't agree on measures to slash the US budget deficit.

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Plunging Growth

As good as an instantaneous halving of the budget deficit might sound, the landing after a plunge off the fiscal cliff would be a hard one. Were taxes to be ratcheted up at the same time as state programs were slashed, it would have an enormous effect on the economy. According to the Congressional Budget Office, 2013 growth would immediately drop by four percentage points, making a recession unavoidable. The number of unemployed would be two million higher than without the cuts.

It is an eventuality that doesn't just put fear into the hearts of Americans. In its annual report on the US, the International Monetary Fund (IMF) referred to the fiscal cliff as the largest risk currently facing America. Investors have already reportedly become more cautious in the face of the looming cuts. Should politicians not agree to a credible plan for reducing US debt, it could ultimately harm the credibility of the dollar as a reserve currency. More immediately, the IMF writes in its World Economic Outlook report published in October, the drastic cuts "would inflict large spillovers on major US trading partners." In other words, an already fragile Europe would become even weaker.

As such, Germany won't be the only country watching closely as US Congress struggles to reach an agreement in coming weeks. Should the US economy radically slow down next year, "it could in the current atmosphere of uncertainty result in a global loss of confidence that would lead to a collapse in investment worldwide," according to the annual report of top German economic advisors released on Wednesday. Nevertheless, the experts warn, simply postponing measures to address the debt and budget deficit problems "would also have long-term costs in the form of still higher sovereign debt."

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The Greek Model?

What, then, is the solution? In the end, the US could arrive at a compromise similar to the one that appears to be forming for Greece: austerity measures combined with more time to achieve budget deficit reduction targets. The drastic cuts currently looming are essentially a kind of debt brake, but it is one with no flexibility built in whatsoever. The US economist Denis Flower proposed in an interview with SPIEGEL ONLINE that Washington should introduce a law mandating long-term debt reduction, but which allows higher deficits in times of crisis.

US politicians, no doubt, would not be fond of hearing their country compared to Greece. After all, the heavily indebted euro-zone country was used during the presidential campaign as a caricature for the horrors of European-style socialism. But their current finances are not dissimilar, with one difference being that the US can't count on outside help as the Greeks have received.

It remains to be seen how US politicians choose to approach the problem. Republicans, having defended their majority in the House of Representatives, could simply let the country plunge off the cliff in the hopes that it would be blamed on Obama. Or, on the other hand, their willingness to compromise may have been increased by virtue of losing the presidential election badly. Republican Speaker of the House John Boehner on Wednesday pledged to work closely with the White House as negotiations begin. He said that lawmakers won't be able to solve the country's problems overnight, but said that voters "gave us a mandate to work together to do the best thing for our country."

Greece's economic problems and the resulting austerity packages it has passed have plunged the country into five straight years of recession. Germany, Europe and the world are hoping that the same fate is not in store for the US.

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