So, here is the good news. Soon enough, Europe will fade from the headlines, replaced with the daily serial of how the US politicians are handling two important fiscal matters.
This week the Congressional Budget Office issued a dire warning that the U.S. will be pushed into a recession if we don’t get our budget in order prior to reaching a fiscal cliff at the end of the year. The report raised many questions, not least of which are: what is the fiscal cliff and how will it impact stocks?
Clearly, the fiscal cliff is the year-end expiration of the Bush Tax Cuts, the expiration of long-term unemployment benefits for some 200,000 folks, and the expiration of the 2% tax holiday on payroll taxes. Some economists suggest if nothing is done regarding these issues, the US GDP could shrink by up to 1.5%, which would push the US economy close to recession.
The other issue in combination with the “fiscal cliff” scenario is the upcoming debate about the US debt. The debt ceiling needs raising again, and I guarantee you both the Republicans and Democrats will use this debate as a forum for pitching their fiscal ideologies to appease their most ardent constituencies. If reason does not prevail, we could easily see the debate taking the market down, way down, especially if the tactic of threatening default on US debt is used this year as it was last year.
Although Europe’s fiscal problems will still be there when the debate starts, my guess is the irresistible drama of the US political debate will lead the breathless media toward frenzy, which will temporarily take away the focus on Europe. Maybe this is a good thing, as the art of politics works better in dimly lit rooms rather than under the harsh lights of the media, and the art of politics is the only thing that will bring a long-term resolution to the fiscal problems of Europe. Now, more than ever in this process, good politics is necessary, as time is running short to get into the next phase of the overarching solution.
European Union leaders have given the bloc’s four most powerful officials a little over a month to come up with a clearer template for euro zone integration, a pitch to persuade voters and markets that the euro has staying power.
The four men, European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi, Eurogroup Chairman Jean-Claude Juncker, and European Council President Herman Van Rompuy are all adept politicians, and their goal is to convince the 27 nations in the EU that greater political, fiscal, and economic integration is necessary for the survival of the EU. In other words, they need to push the overarching solution forward, which is a more unified EU, under the direction of an overarching political structure. The problem, of course, is the 27 EU nations all have a history of socio-cultural independence, and it will be difficult for each to surrender so much sovereignty to a “higher” government. On the flip side, the 27 EU countries could easily recognize that letting the EU crumble means letting go of the powerful position of the largest economy on the planet. Each economy is stronger with integration than without. One can hope, once again, reason will prevail in the upcoming European debate, as well as in the upcoming US debate.
Hope or not, be prepared for the market to voice its opinion loudly about both debates.
Trade in the day; Invest in your life
