Why We Should All Hope America Steps Back From the Fiscal Cliff

Any deal is crucial not just for the US but also the global economy. Even a short period when Washington could not pay its bills would have a devastating impact on global confidence.

The manoeuvrings in Washington over the fiscal cliff are being viewed with a mixture of disbelief or outright distaste by non-Americans. With the stakes so high, there is genuine bewilderment at the daily twists and turns of the negotiations, the backroom dealing and the brinkmanship.

There is, of course, global relief that some Republicans at least appear to have dropped their outright opposition to any tax rises on the wealthy which could pave the way for eventual agreement. But it is mixed with concern that progress has been so slow, that any deal is far from certain and astonishment that no attempt is even being made to find a permanent solution to America's public finances. Without addressing the underlying mismatch between revenue and spending, a recurrence of the same crisis in the near future seems inevitable. But hopes now seemed to be pinned on somehow reaching a sticking plaster deal to get the country solely through the next few weeks.

It is easy to blame the partisanship of Washington's politicians for these failures. But the truth is that their divisions merely reflect the deep polarisation within US society, something which those who live outside America can struggle to comprehend. When I talk to sensible Americans, I am still taken aback to hear policies such as universal healthcare - pretty much accepted across the political boundaries on this side of the Atlantic - rejected angrily as one step from bolshevism.

Bridging such a gulf is not easy for any politician even if that was their ambition. But it is not only on ideological grounds that the US is so deeply divided. There is a similarly enormous gulf in wealth and opportunity. America's economy may be having a difficult time at the moment but it has grown strongly in the last 20 years. However, the overwhelming majority of the country's citizens have seen no benefit from this prosperity.

Real incomes for most Americans have fallen over the last 20 years while the rich have seen their wealth grow very substantially. Rising standards of living for the majority have only been afforded by heavy consumer and Government borrowing which is at the heart of the problems the country now faces.

Given these divisions, we should not be so quick to judge the talks being held in Washington. Instead we should be grateful that 'pork-barrel' politics is alive and well and still seems likely, I believe, to pull us back from the brink.

It might not look good but it is some ways far more effective that the revolving governments and the resultant inaction we see in certain European countries. It is certainly far better than allowing the US economy to fall over the cliff.

Unfortunately we are in a much more precarious position than when the Clinton/Gingrich stand-off shut down the federal government in 1995. Any deal is crucial not just for the US but also the global economy. Even a short period when Washington could not pay its bills would have a devastating impact on global confidence.

Despite its problems, America is still seen as a safe haven by the majority of international investors. Regaining lost credibility, as we have seen in Europe, is a long and very expensive task. If the crisis was to continue for any length of time, the experts warn that it could knock as much as 1% off global growth next year. The world economy is in much too fragile a state for a shock of such severity.

And before we get on a high horse here in Europe, we should reflect on the failure of Governments in Europe to tackle their own problems. The Eurozone is back in recession with its politicians similarly unable to find long-term solutions to its structural problems although the ECB's promise in September of "unlimited firepower" did at least calm markets.

In the end, the choice remains that either some countries are going to have to leave, or be ejected from, the single currency or they are going to have to accept moving more strongly down the road to economic union and giving up economic power to a central European bank. While the final decision to hand power over to Germany can continue to be put off at the cost of a stagnant economy, it cannot be ducked forever.

So while America and its politicians do need to bite the bullet and find a permanent solution to the country's debt, there are hard choices which need to be made here in Europe as well. For now, we should all be hoping this holiday season that there is enough good will in Washington to patch together a deal on next year's budget, no matter how temporary or unedifying the process may seem. 2013 will be happier for all of us if they do.

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