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Q & A: Walking the Tightropes in Europe and the United States

Posted November 27, 2012 | Categories: Q&A
1. Last night European finance ministers and representatives of the International Monetary Fund met in Brussels but couldn’t reach agreement about releasing some already promised financial aid to Greece. What’s going on in Europe?
That’s correct and what made the lack of agreement even more bewildering was that when the ministers entered the negotiations that evening, they promised that they would come to an agreement … and they couldn’t reach one. So they’re returning in a week to try again.
Much of the failure stemmed from an ongoing dispute between the IMF and European leaders. The IMF wants to make sure that Greece is provided with enough assistance that it will be able to get its economy going again and reduce its debt down to manageable levels—thought to be about 120 percent of one year’s national income. But the European ministers didn’t have authority from their governments to make additional concessions, so the negotiations failed.
Last night’s failure to agree may not be such a bad outcome. Europe’s leaders have a very difficult time reaching agreement on these kinds of issues because they are representing 27 different states, each with its own culture, economic predicament, and politics. Sometimes external pressure is needed to force parties to put aside some of their parochial differences and to focus directly on the problem at hand. In this case, the Managing Director of the IMF, Christine LaGarde, is playing a productive role by forcing the European leaders to consider whether the European and IMF aid package provided to Greece is sufficient to put Greece back on a sustainable growth path.


2. So the U.S. President and U.S. Congressional leaders are also facing negotiations regarding the approaching fiscal cliff. Would a failure to reach agreement be OK in the United States?

 If a good agreement on U.S. budget policy is not enacted by the U.S. Congress, this would likely trigger big negative economic effects. But in many ways the political environment has been changed by the simple fact that the U.S. elections are over and there is still divided government, with the Democrats controlling the Presidency and the Senate and the Republicans controlling the House of Representatives. However, now that there is no immediate election to contest, the two parties have much stronger incentives to compromise and actually reach an agreement that will improve the fiscal health of the U.S. government. There’s a second factor that has also come into play in the last few weeks: Big businesses and their industry associations are starting to lobby political leaders to come to a compromise solution. And their decision to finally engage more forcefully could well be a game changer, as they are now actively warning of dire economic consequences without such an agreement.


3. Is the fiscal cliff real? Will there be dire consequences? 

In some ways, the fiscal cliff is a problem created by Congress when the Senate and the House could not reach an earlier agreement on a budget deal. Instead they agreed that if they couldn’t reach a budget agreement by the end of 2012, huge undesirable cuts in defense spending and health spending would be triggered. And the House and the Senate haven’t come to an agreement so far.

Imagine that a couple is trying to decide whether to have green beans or asparagus for dinner and they agree to send a $50,000 gift to a politician who they particularly dislike if they can not agree … one would guess that they would come to an agreement … and one would guess that U.S. politicians will, given that U.S. elections are now in the rearview mirror and organized interest groups are exerting more pressure on them to reach a compromise on tax reform and spending cuts.


-- Sumner Lacroix

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