Why is America's fiscal cliff more worrying than Europe's?

Anti-austerity protesters outside the Greek parliament The programme for Greece debated by eurozone ministers involves spending cuts and tax rises worth 7% of GDP in 2013-14

Like many European politicians, finance ministers meeting in Brussels on Tuesday are worried about the US heading over a fiscal cliff next year. For good reason, you might say: given a fragile recovery, all of us in Europe are now unusually dependent on US growth.

As I discussed last week, there's reason to expect a solution to America's cliff, though not necessarily a pretty one.

The big questions now are whether Congress and the president will reach a deal before, or soon after, the Bush-era tax cuts expire at the end of the year; and whether rich households end up paying higher marginal tax rates, or just getting fewer deductions. Republicans seem resigned to smaller deductions, but not to higher rates.

But critics of eurozone austerity programmes can't help seeing a rich irony in German politicians fretting about accidental tax rises and spending cuts in the US. Aren't they the ones who've been insisting that large parts of the eurozone head over their own fiscal cliff, entirely on purpose?

Think about it: America's budget deficit in 2012 will be 8.7% of GDP in 2012, according to the IMF. That's higher than any country in the eurozone and nearly three times their magic 3% limit.

What is more, the IMF reckons that nearly seven percentage points of that US borrowing is structural - it won't go away with economic growth. That is a larger structural budget hole than any of the troubled eurozone economies, including Portugal and Greece.

Portugal's structural hole is just over 3% of GDP - half the size of America's. Encouraged by its eurozone partners, it is now planning budget cuts worth even more than that, in 2013 alone. The Greek programme that was debated last night by eurozone ministers involves spending cuts and tax rises worth 7% of GDP in 2013-14, the majority in the first year.

This will be the third year of steep budget cuts for most of these countries, yet policy makers in Brussels, Frankfurt and Berlin think it the bare minimum to maintain market confidence. Why, say the critics, do the same officials think it would be such a disaster for the world economy if America finally started to do the same in 2013?

One answer that economists might give is that European policy makers are conflicted on the subject of fiscal austerity and growth.

Remember those new estimates from the IMF of the "fiscal multiplier" - the amount that a given amount of budget cuts can be expected to cut growth?

Neither the European Commission nor the IMF itself has incorporated these new, higher estimates in its forecasts for Spain and the rest. That suggests that these economies will do even worse in 2013 than the commission or the IMF expects. Remember the Fund overestimated growth in the eurozone this year by a full two percentage points.

For example, the latest forecasts from the commission predict that the Spanish economy will shrink by 1.4% in 2013, but many independent forecasters expect much worse. And the average private forecast for Portugal is that its economy will shrink by 2.3% next year - not 1%, as the commission now expects.

But there's another, more sympathetic explanation why European leaders seem less worried about Europe's fiscal cliff than America's: they just don't see an alternative.

The European Commission, the ECB and the rest think that America can afford to sort out its fiscal problems gradually - but the likes of Portugal and Spain cannot. These countries may be throwing themselves, repeatedly, over a fiscal cliff. But as long as neither eurozone taxpayers nor the global financial markets are willing to finance their current borrowing, the feeling is that austerity and recession are the best they can do.

Is this path really the best of a bad lot? Negotiations over the Greek programme are bogged down on precisely this point.

European officials are resigned to the idea of giving Greece another two years to meet its debt and deficit targets. But neither the Germans nor anyone else seems willing to pay to tide Greece over in the meantime. So the wrangling is set to continue, for at least another few weeks.

In the meantime, you can see why Americans might think it showed some nerve on the part of the Europeans. In effect, Europe's politicians are telling the US government that it needs to keep borrowing to support global growth - even though, when it comes to their own economies, they are doing the exact opposite.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 50.

    Greece need to bite the bullet and withdraw from the Euro. Had they done so when this crisis first started they would probably be in a lot better situation then they are now

  • rate this

    Comment number 49.

  • rate this

    Comment number 48.

    I think you will find that is against International Law, you are effectively guessing what profit they make and don't take into account any regional cost variations. And by the way Apple overseas tax rate was less than 2% so they must have fixed all their overseas profit margins to achieve that.

  • rate this

    Comment number 47.

    39.Maxwells Demon
    austerity only works if reduced domestic spending i(aggregate demand) is replaced with external spending,
    Compare it with China's predicament. It's economy has shrunk to an unsustainable level because it's been EXPORT based.

    The only way to boost it would by stimulatating DOMESTIC consumption.

    But for that comrades would have to increase wages.

    And then what?!

  • rate this

    Comment number 46.

    America has run a sepnding / income deficit since before 1970 with the excpetion of a 3 year period;

    The USA has only had surplus for 7 relatively short periods since adoption of the Constitution (1789). The only time it paid off all its debt 1835, it was rapidly (1837) followed by a major depression

  • rate this

    Comment number 45.

    "In effect, Europe's politicians are telling the US government that it needs to keep borrowing to support global growth - even though, when it comes to their own economies, they are doing the exact opposite"

    That should be 'each others' economies'

    I don't see the French taking the pain they advocate for Greece

  • rate this

    Comment number 44.


    PM on FLAT TAX: "The only fair tax I know of."

    There we differ. I feel that those that can pay more should.

    Economy 101 test question: who pays and contributes more to his country's treasury:

    1.those who pay 25% of $25K?

    2. those who pay 25% of $250.000?

    3. those who pay 25% of $2,500,000.00?

    4. those who pay 25% of $25,000,000.00


  • rate this

    Comment number 43.


    It's easier than you think. You tax the companies on their global profit margin applied to UK revenues. You ignore the fictitious internal transfers

    That would take care of perennial re-location threats from the likes of WPP and the banks. And if you think Apple would withdraw out of UK market because of that - then you don't understand Capitalism

    Where there is a will...

  • rate this

    Comment number 42.

    The IMF formula has always been AUSTERITY+DEVALUATION+DEFAULT. It is only brecause of the DOGMA that Greece Portugal and Spain must not leave the EURO that these countries are being put through the mangle. I do not think that IMF would have taken part in the programmes if Strauss-Kahn hadn't been Chairman and about to run in the French presidential election. Clearly P G S governments accept DOGMA

  • rate this

    Comment number 41.

    Stephanie, I realise that fairness is very difficult to achieve on a blog but..
    you were quick to blow the Government (and BOE) trumpets when inflation dropped to 2.2% but you make no reference to the current 2.7%.
    With a weaker sterling, oil is going to stoke inflation for the next year.
    What is the BOE doing to get back to their target of 2%?

  • rate this

    Comment number 40.

    No21 John.
    If certain banks are too big to fail they will continue to behave in their 'socially useless' greedy and incompetent ways and 'moral hazard' will remain a feature
    They need to be broken up.
    Perhaps it is time to withdraw deposit insurance, inform them that there will be no bailouts after a two year period. Customer response too such proposals would be interesting.

  • rate this

    Comment number 39.

    austerity only works if reduced domestic spending i(aggregate demand) is replaced with external spending, if the US implements significant austerity then its important contribution to Europes external spending will not only "not increase" but actually decrease. The IMFs estimates of economic performance under austerity have always been way over the top & still are (even with latest revisions)

  • rate this

    Comment number 38.

    Comrade Ogilvy: "The US view (generalising) is to reduce taxes at every opportunity. That does not clear debts, even if you do reduce services."

    As we must, considering that unsustainble ENTITLEMENTS ( almost bankrupted Social Security, Medicare, etc.) cannot be financed by increasing taxes on the "rich" even to 100%.

    While LOWERING business taxes stimulates economic GROWTH!

  • rate this

    Comment number 37.

    No one believes those forecasts Steph.

    The Spanish economy will shrink by at least 1.4% in the first 3 months alone and overall by greater than 4% for the year.

    Portugal is about to fall off a cliff.

    The sooner the German gold is repatriated, the sooner a gold backed EZ bond can be issued and full fiscal union with fiscal transfers can be implemented.

    It will be done before Merkel election.

  • rate this

    Comment number 36.

    #23 25 and 35

    Think the post at 23 says its all

    it is easy to spend other monies

    maybe JFH is worried what the burocrates will do for jobs when the EZ/EC collapses

  • rate this

    Comment number 35.


    Dear John, simply expressing a view that differs from yours does not render it "bile". A great many others hold a similar view, including millions of people in Greece, though I accept not the majority.

    Please feel free to point out every factual error, of which my simple post is so full.

  • rate this

    Comment number 34.

    And 299.You
    Just now
    How are the Portuguese reacting to austerity measures?

    Monday meeting with Merkel had to be held in a fortress to protect her from an enthusiastic crowd, as Der SPIEGEL reports:


  • rate this

    Comment number 33.

    Nearly all 'western' govts overspend heavily and unsustainably relative to 'customer-taxpayers' willingness and ability to pay. No 'leaders' dare get a grip of this in our democracies. Only markets have the power to confront this, in their own time. Results so far: 'Med' countries crunch time; Japan in sort of zombie zone with govt debts maxed out.

  • rate this

    Comment number 32.

    Re #23 WunderfulBBC

    If it'll take another 30 Billions plus to retain Greece in EU by hook and by crook, how much money's going to remain in the kitty for ITALY's bail-out?!

    P.S. To make you feel better... Former BBC's DG Thompson has assumed duties of New York Times Co.'s CEO. :-)

    [such a bailout requring ca 2 TRILLION euros;
    with Italy having had no real growth since 1998! ]

  • rate this

    Comment number 31.

    As long as HMRC are the dining companions and conference guests of the big corporations, tax will never be properly levied.
    The top brass in the tax office have 'gone native' and will now only ever chase the little man who owes them a £100 rather than the big boys who 'owe' them £millions


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