Lack of US progress on fiscal cliff solution will harm Europe, OANDA warns

The US Fiscal Cliff that was recently agreed could be seen as another kick of the ‘can down the road’, but the American fiscal crisis has the potential to further complicate transatlantic cooperation, especially as G10 economies try to insulate themselves from deeper fallout in the US, according to Dean Popplewell, chief currency strategist for OANDA.

“For US policy makers, their backs are firmly against the wall, with time of the upmost importance over the coming month as they have yet to agree on a longer-term fiscal adjustment program for the US,” the strategist said.

But Popplewell added that when the US sneezes, the global economy has a very good chance in catching a cold.

“Having no longer-term solution to the US Fiscal Cliff is likely to reduce European confidence in Washington’s global leadership. This could allow Asia to surpass North America and Europe in global power,” he said.

Moreover, the relationship between Europe and the US has waned ever since the onset of the global recession in 2008-09 and after the US downgrade in 2011.

“Due to ECB’s liquidity injections, low interest rates and bailout backing from the euro-zones backbone, Germany and France, has allowed economies like Italy and Spain some breathing room to get their economies in shape,” he said

Looking ahead, lack of US progress in defining a longer term solution will be globally harmful, especially so for the Euro periphery economies, like Italy and Spain, who require market funding access.

“The next two months will be critical for global economic harmony,” Popplewell said.

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