The US elections and their consequences - a European perspective
The USA has voted: Barack Obama remains in office but the stalemate in Congress continues. It is clear that progress on key political issues like fiscal policy will require a willingness to compromise. The primary objective here is to achieve a more sustainable public-finance situation, but also, in the short term, to avoid the "fiscal cliff". What is the outlook for budgetary policy? What are the risks for the US and for the global economy?
In the short term, the “fiscal cliff” is the biggest risk facing the US economy
© Munich ReThe USA must find a sustainable solution for its public finances; otherwise there is the threat of a sovereign debt crisis.
Without a sustainable budgetary policy, there is the threat of a sovereign debt crisis
In recent years, the total level of US government debt has risen dramatically. Whereas in 2007, i.e. before the financial crisis began, it totalled approximately 67% of GDP, the overall debt position in 2012 is estimated at 107% of GDP. That is more than the figure for the whole of the eurozone (2012: around 93% of GDP). There are three reasons why the current situation in the US is much less dramatic than in Europe:
1. Government debt there is chiefly at federal level (in the eurozone, the debts lie with the individual member states)
2. In comparison with the eurozone, the USA has institutions that are generally far better at handling the challenges of indebtedness.
3. Investors in US government bonds invest in a market that is broader in scope and more liquid than any other bond market worldwide.
Accordingly, US government bonds are seen as safe-haven investments, and yields are considerably lower than in almost all of the eurozone states, despite a high level of government debt. The fact that yields are actually negative in real terms, i.e. lower than the rate of inflation, may aid the US Secretary of the Treasury with budget planning. However, this is no ready-made solution for handling high public debt in general – unless there is an extended period of ongoing "financial repression", where yields remain lower than the rate of inflation in the long term.