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 90.

    The recent US electorate voted either along racial or idealist lines, proving populations are either unwilling or ignorant in accepting econimic reality.

    America chose more debt, more immigration, more welfare more socially liberal idealism. I'm afraid the day of reckoning is approaching, and like Germany in the 1930's Europe and the West have difficult choices ahead.

  • rate this

    Comment number 89.

    USA is different from Europe for 3 reasons. US$ is for time being the global reserve currency, US economy is much more closed than Europe, and China holds so many US$ bonds that the US debt is China's problem!

    China will have to manage getting rid of US$ and when it has US will go protectionist. Give it, er, 4 years!

  • rate this

    Comment number 88.

    #87 yes they shoudl and they should be sorting out the CORE issues such as CHINA and INDIA low wage high poluting dirty countries

  • rate this

    Comment number 87.

    Neither most of Europe or the USA or indeed the UK should be cutting their government deficits in this recession..
    Read Richard Koo (Chief Economist at Nomura International) & learn.
    [Unsuitable/Broken URL removed by Moderator]

  • rate this

    Comment number 86.

    Sick and tired of Greece enough already..Let them go bankuprt and stop harasing honest hard working people in UK, Germany, Austria, Holland etc. with new taxes and bailouts

  • rate this

    Comment number 85.


    Markets will always have control, previously governments had something called ideology they kept to there principles even if it offended markets. Now with so many countries in bed with markets the principles of democracy have gone out the window.

    The only way to change this is for governments to live off of there tax intake only with tax rates being the same worldwide to stop tax evasion.

  • rate this

    Comment number 84.

    " the bare minimum to maintain market confidence."

    Therein lies the problem - markets now rule countries.

    How do we reclaim democracy?

  • rate this

    Comment number 83.

    The Greek Euro........... neat idea. I'm sure there are a thousand reasons why one devalued Greuro would not equal an €

    But at the end of the day, money is funny. It's actually hilarious and even more so, those who worship it. I'm a banker and l self regulate ~ it's so....... cool.

  • rate this

    Comment number 82.

    Fail to see why any government should spend more than it collects.
    This only leads to a false economy, which is where we are now.
    A correction will take place, unfortunately it will not be managed.
    Fail to see why Greece keeps borrowing more, their young talent will go to work in Germany, leaving a larger debt per capita, and economy grinding to a halt. They should default and stay in the Euro!

  • rate this

    Comment number 81.

    The lesson of the last four years is the comolete lack of transparency that surrounded Lehman's default and the associted panic which ran through banking and its investors who could not believe, that a US President would let a major bank flop, because it was stupid in its business practice.

    Look at Lehmans today and learn the lessons.
    It was a stupid, greedy and pathetic entity above the law.

  • rate this

    Comment number 80.

    What is going to become an immense embarrasment, is getting the Troiks to admit they have layed an Easter egg at Crimbo and sort things out. It won't happen, will it. Can you imagine Drahgi or LaGarde, eyes down and saying ..... sorry.

    It is a truly mad world of banking insanity and inflated asset prices.

  • rate this

    Comment number 79.

    14. powermeerkat
    "...And those people are worrying about US economy growing at 2%..."
    If you considered per capita GNP rates of increase instead than aggregate, you'd get a different picture.
    Europe has near-zero population growth.

  • rate this

    Comment number 78.

    It takes courage to state that "The US is responsible for fixing its own problems, and is trying to do just that". For years, nay, decades, the US has been irresponsibly trying to paste its problems on someone else's back and delay adjustment. The whole construction is bound to collapse, and very soon too.

  • rate this

    Comment number 77.

    Any economy is as strong as its weakest link, weakest links are supported by fiscal transfers, in Britain we have the barnet formula something Alex Salmon forgets. The way the EZ has given bailouts as loans and not transfers. The problem with the EZ is every country went into the currency forgetting that when they did they gave up all sovereignty and became one economic area.

  • rate this

    Comment number 76.

    The European approach to restoring mandated deficit levels is an entirely recless approach that is destroying GDP in swathes, and France is now being lined up for the same by the IMF. A country is not a bank and very much more than a busines

    It is not completely apparent yet, but where Latvia led, the EU is now accelerating at break neck pace. EU imports have fallen off a cliff~ disaster is here

  • rate this

    Comment number 75.

    The EZ is in a mess countries like Greece want Tourism to drive growth. How can this happen when they use a currency with no integrity with items costs being as diverging as there economies are, this can only work if the end goal in national currencies again. Also wages in a union like the EZ should be ideologically similar for doing the same kind of work all it would take would one lawsuit ECtHR.

  • rate this

    Comment number 74.

    #73 JFH

    NO to EU/EZ and a USSR type euro, perhaps if you love it so much you should move there then ?

    YES to EFTA and our own freedom

    Big is not best

    Little is lively

  • rate this

    Comment number 73.



    "The EU is (a) bloated?"

    Actually the EU itself is about the size in bureaucrats (32,000 in Brussels) of the group that runs Scotland (46,400) - a state with 1/100'th of the population.

    Is that what you mean by bloated?


    You have an MEP? The selection system for the rest is via elected leaders of the 27 states.

    Wrong again!

    I win!

  • rate this

    Comment number 72.

    Rosette (#54) to PM #44 re FLAT TAX

    "Who is getting screwed?" [in the current system].

    Isn't it obvious? Those who succeed!

    What incentive small businesmen, better mouse trap inventors, etc., have to succeed if they know that the more money they eventually make as a result of their success&hard work the more of it will be taken from them by fiscus?

    The answer is: basically none.

  • rate this

    Comment number 71.


    Your figures correctly put the debate about the US fiscal cliff and the EU's austerity measures for Spain, Greece and Portugal into sharp focus, or contrast.

    EU states have little regard for the UK position on its budget. Seems like Schaeuble, Merkel & Germany are a considerable obstacle to a real debate & solution. Hollande & Commission need to highlight risks & offer alternative.


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