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US fiscal cliff is as bad as eurozone crisis, says Bootle

The looming 'fiscal cliff' could be as destructive to the global economy as the eurozone crisis, warns Capital Economics' Roger Bootle.  

 
US fiscal cliff is as bad as eurozone crisis, says Bootle

The looming ‘fiscal cliff’ facing the US following November’s presidential election could ultimately prove as destructive as the eurozone crisis, Roger Bootle has warned.

Bootle, founder of Capital Economics, argued that there is a ‘reckoning coming in America’ since the country is ‘peculiarly’ bad at resolving the friction between its historically low tax regime and the penchant for high levels of public spending it has shown in recent memory.

‘The US faces some serious problems. Some think the situation is at least as serious if not worse than the one facing the eurozone.’

Bootle is not the only highly regarded figure to have warned on the US in recent weeks.  Troy Asset Management's Sebastian Lyon fears America's threat is far greater than the risk the eurozone poses.

But while the US may be debt-laden and will struggle to overcome its political gridlock, Bootle is more upbeat regarding its ability to withstand the fallout from the eurozone’s deepening woes, pointing to the US’s relative strength during the Asian crash and Mexican peso crisis.

‘For the US, Mexico is a major trading partner and the Mexican peso crisis left barely a mark on the US economy. Neither did the Asian crisis, which was huge. Some of those countries suffered [GDP] falls of 20%, which is equivalent to the Great Depression.’

German breakaway

Speaking at a Citywire conference, Bootle said the eurozone should divide along north/south lines, with Germany leading the pack.

‘Germany ought to leave, taking with it close allies and satellites – the Netherlands, Austria and Finland to form a northern euro. I think it will be a lot less messy.’

However, he conceded that a Greek exit will be the more likely route and he expects the troubled Mediterranean state to be out of the euro before the year is out.

Bootle described himself as ‘eurosceptic’, pessimistic about the concept of the eurozone, since the region attempted political and fiscal integration ‘back to front’, uniting a single currency before fiscal unity.

‘They got away with it so far but they can’t get away with it for very much longer. Either they go the whole caboodle or they break up, and I can’t see how they would go the whole caboodle with the existing members.’

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6 comments so far. Why not have your say?

Rob Walker

Jun 26, 2012 at 12:39

Maybe the currency supply problem would be circumvented if a 'Sovreign Currency -1' and 'Sovereign Currency- 2' etc was printed / coined and held by the Euro bankers pending any exit, as an interim currecy equating to the new Drachma, New Peso etc as any country withdraws from the Euro. Each exiting couintry would then just apply to be the owner of this interim issue. Ultimately this would then be physically replaced with the country's own currency as it is introduced on a 1 for 1 basis.

You see, it is not beyond the wit of man to resolve this particular problem. However, it would need foresight, action and decisions so I suspect that's not an option for our European 'Leaders'.

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William Bishop

Jun 26, 2012 at 13:10

Perhaps the headline should have read "US fiscal cliff is as bad as eurozone crisis, but then again maybe on balance it isn't after all", which may lack a punchline, but seems better to reflect Bootle's actual views!

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S G

Jun 26, 2012 at 13:22

The people in charge are doing nothing, but I can tell you what will happen with them

If it collapses they will blame everyone else but if it manages to pull though which will be a lot more luck then actual judgement, these same people will take up the title of Euro Hero.

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MOGO

Jun 26, 2012 at 17:09

I cannot see Germany, France et al being overuled by the likes of Van Rompey, Barrosso and their ilk, the whole integration project is light years away, so let's forget that and look at other alternatives.

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ICD

Jun 27, 2012 at 00:28

Rob Walker, you hold €100k Greek gilts, so you are expecting €100k back some time, but then Greece says to you “Here are your 100k Sovereign 17’s. Oh, by the way, we have devalued, so your 100k Sovereign 17’s are only worth half their original value, but at least we repaid the 100k, so everyone’s happy”. Sounds like a really good idea! I would like to say to all the obsessive anti Euro folk that money is supposed to represent something, not be something to be manipulated by extravagant politicians and financiers making money for themselves out of thin air.

BTW I think that Greece will be using Euros in a year's time, and of course USA has the strength to cope with their financial problems, but they will have to make some changes, of course.

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Rob Walker

Jun 27, 2012 at 22:05

THanks ICD, but how is that any different than issuing Drachma's? All I was saying was that the physical delay in issuing a new currency could be circumvented. It is not an unmovable obstacle !

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