The “fiscal cliff” has been debated largely as an American issue and risk, but the impact could be even greater for some in remainder of globe, from a struggling Europe to developing economies. In short, a rise in taxes and cuts in US programs could affect economic activity and global monetary liquidity. If the fiscal cliff risks a recessionary shock for a fragile US economy, the effect on others would be that of tail being wagged. Could a new US driven austerity spark a global recession and politicians advocating closed markets as occurred during the Great Depression and established fertile grounds for the rapid ascent of fascism in the 1930’s leading eventually to WWII?

Fragile Europe most Vulnerable at Time of Austerity & Transformation?

Europe now is even more fragile as it goes through a series of austerity induced configurations and presumably is undertaking a series of economic reforms. Europe needs the US to continue to be a driver for exports and most critically to continue to deliver monetary liquidity – “easy money.” While some complain this will deal unchecked inflation in the future, the major concern now is the whole financial system potentially seizing-up again as in the 2008 financial crisis. if the US goes off the fiscal cliff it could lead to financial institutions refusing to lend to businesses/enterprises and each other, (thus, the whole financial system seizing-up), as well as loss in consumer/business confidence, spending and investment with US but also global economic activity dragged to a stall.

Roiling at Center while Tossing Around those at Periphery of Global Economic Vessel?

Developing economies from China to Mexico but also Japan, Korea, Canada, Australia as well as the Middle East and Europe would be affected by a drying-up of the US as import market and more critically by the contaminating uncertainty extending from global financial markets centered in New York and the US. Uncertainty ironically would cause investors to flock toward the US dollar as safe-haven, (even as the US political system is roiled by the fiscal cliff debate/maneuvers), and discourage investments from what may be considered more outlying markets. This is a great example of how uncertainty in the global financial system may cause some roiling at such center but would toss around the economies the farther away that they are at the periphery.

Would US also most quickly Recover or would there be more Permanent Damage?

If the US did go over the cliff in the next few days, it is most likely to recover more quickly as again more troubled economies and periphery economies may suffer from a more prolonged dislocation inflicted by the uncertainty. Some argue that the longer the roiling at the center the more prolonged and painful tossing at the edges. Some argue that going over the fiscal cliff may be a positive as it delivers a dose of needed spending cuts, particularly in entitlement programs and defense. (While many Republicans and so-called conservatives point to fact that US Government has absorbed an ever larger share of the US economy, it is actually areas as the Pentagon and Homeland Security that have been allocated the largest share of discretionary spending in the post 9/11 decade and frequently with minimum political scrutiny and financial accountability).

US Political Leadership no longer up to task to Lead Globe’s Economic/Financial Center?

We are of view that while some spending cuts may be longer-term favorable for US, the current economic environment may be too fragile for US but especially global economy. Most critically though, the US fiscal cliff, or more accurately the manner in which the US plunges over, may provide the ever more frightening message that US political leaders are not able to go beyond crude politics in doing what is most responsible for America and its citizens as a whole. Autocratic leaders as those in Beijing or Moscow are not really expected to act transparently and with a sense of greater responsibility. European leaders have also exhibited a lack of vision as well as cohesion when the world was just starting to believe in the European project. The US, despite many complaints and some failings, has been the global economic leader not only because of military power, economic might and entrepreneurial initiative but also because it has been believed to act responsibly especially when its own as well as globe’s financial interests where at stake. The current plunge over the fiscal cliff may prove otherwise.

By, Ambassador Muhamed Sacirbey

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