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Europe Warily Watches US 'Fiscal Cliff' Talks

  • Henry Ridgwell

Several European leaders have struck a downbeat tone in their end-of-year addresses - warning that further economic pain lies ahead in 2013. Added to the euro crisis is a fear that fiscal negotiations in the U.S. Congress could have a deep impact around the world.

In European capitals, new year celebrations are underway. The fireworks are welcoming in 2013. But it has been a turbulent 12 months for Europe - and German Chancellor Angela Merkel ended the year on a somber note, warning that the coming year will be even more difficult.

“The reforms that we've introduced are beginning to have an impact," she said. "Nevertheless we need to have further continued patience. The crisis is far from over.”

Her speech may have dampened year-end celebrations - but she has good reason to be cautious, says Spyros Economides of the London School of Economics.

“There’s an election in Germany in about 10 months’ time and that means that nothing drastic can really happen before that election cycle is closed," he said. "If Angela Merkel were to win, I think you’d see a slightly more assertive Germany saying ‘well now we have to make quite big changes to European institutions.’”

While not a member of the euro currency, Britain is also trying to drive through changes in Europe. Many lawmakers in Prime Minister David Cameron’s own party want Britain to leave the EU altogether. In his end-of-year speech, Cameron also struck a cautionary tone.

"Britain is in a global race to succeed today. It is race with countries like China, India and Indonesia; a race for the jobs and opportunities of the future," he said. "So when people say we can slow down on cutting our debts, we are saying no."
Debts continue to drag down Spain’s economy. Bankia, which had already been rescued once by the state, is now getting an EU bailout - but it will cost 350,000 savers and pensioners their investments.

Spain’s Prime Minister Mariano Rajoy said the Spanish state finances had at least survived 2012.

"Is avoiding a bailout the greatest achievement of the year? No. I think the most important thing this year has been to change course, correct the direction of economic policy,” he said.

Sony Kapoor of the economic analyst group Re-Define says such talk is complacent.

“The growth prospects have never looked worse," Kapoor said. "Unemployment is at record levels and the political space and political capital that is available to handle these increasing economic problems is actually shrinking.”

European politics is about to witness the return of an old face, as former Italian Prime Minister Silvio Berlusconi - forced to resign in 2011 at the height of the debt crisis - plans to lead the center-right campaign into the February general elections. He’ll face incumbent Mario Monti.

But Europe’s recovery could be completely derailed if the U.S. Congress fails to reach a deal on government borrowing, and falls off the so-called ‘fiscal cliff’ - says Majoj Ladwa of London brokerage firm, TJ Markets.

"If the situation isn't resolved, equity markets could start pricing in the negative aspects of this whole episode, and that is the U.S. economy potentially going into recession," Ladwa said.

Analysts say the old adage still rings true - that when the U.S. sneezes, the rest of the world catches a cold.

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