November 22, 2012
The U.S. isn't the only country hanging from a fiscal cliff.
While investors grew increasingly optimistic this week that Democrats and Republicans will agree on a compromise on tax increases and spending cuts that will help the U.S. avert a recession, political leaders in Europe have also been tussling over what to do with debt problems on the continent as recession deepens.
Greece was back in the headlines Wednesday, and the news was not hopeful. European countries are fighting over a new round of aid for Greece — one that was expected to be approved this week. After 11 hours of meetings, European leaders could not agree on terms, and they postponed decisions until Monday. Greek street demonstrations over austerity requirements are expected to occur this weekend.
Greece has been cutting spending and increasing taxes in deficit-trimming measures required by other European countries as a condition for granting aid. With cuts, unemployment in Greece has climbed to more than 25 percent. But Greece needs help handling its debts, and estimates are that the debt will be 190 percent of gross domestic product in 2014. Some analysts think Greece, even with aid, is on an unsustainable path that will necessitate the country leaving the euro.
Meanwhile, weakness is spreading in Europe, and France is starting to look like the next case for worry. This week, Moody's cut France's Aaa credit rating one notch, to Aa1, while also keeping the country on a negative outlook. Moody's mentioned concern about France's structural impediments to growth, and analysts have said the country needs to loosen labor requirements and other regulation so the country is more competitive.
The downgrade suggests French bonds are riskier than thought. If investors insist on being paid higher interest to compensate them for taking on that risk, the higher interest will add to the government's costs and make it more difficult to pay off debt.
"The bond market is not known for its patience," said Cumberland Advisors economist Bill Witherell. "Market sentiment could rapidly turn against France."
The country has much to do and little time to do it to improve its finances and competitive position in the world, Witherell said.
Economic problems elsewhere in Europe continue to cause worry this week, analysts noted.
"Adding insult to injury was the threat of more downgrades as well as a reduced outlook for Italy's banking system as asset quality deteriorates further," said Gluskin Sheff economist David Rosenberg. Also, the Bundesbank downgraded the German economic outlook.
The effect of a weakening Europe has been felt by U.S. companies that depend on customers in Europe to buy products. Some economists are expecting help in the sector as many areas in the U.S. rebuild after the destruction from superstorm Sandy.
But Paul Dales of Capital Economics said Wednesday that beyond the initial blip up from rebuilding, the upturn is "unlikely to change much when the global economy is set to remain weak."