Make or break week for E.U. debt crisis

US political wrangling clouds the outlook

On Friday, a group of Republican US lawmakers indicated they were pursuing legislation for the US to block the IMF from bailing out embattled Eurozone governments like Italy or Spain. News of the initiative added to EUR’s decline following the anemic US employment report. But the move has no chance of succeeding and would be vetoed by the White House in any event. Even the Republican leadership announced that they would not support the measure, likely consigning it to mere political posturing.

More importantly, the payroll (Social Security) tax cut expiring at the end of the year has yet to be extended, with the two sides disagreeing over how to pay for it. If the tax cut were to lapse, it would shave about 0.8% from 2012 US GDP, making it a potential serious threat to the US recovery. But 2012 is an election year and to allow tax rates to rise for the entire working population would be political suicide for the offending party, so at a minimum, I would expect the tax cut to be extended, but not paid for. Extended unemployment benefits are also set to expire at year-end and need to be renewed or millions of long-term unemployed will begin to lose benefits, also dampening the near-term outlook. This is a closer call, but I think it will also be passed, effectively maintaining the status quo into 2012.

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Brian Dolan is chief currency strategist at www.FOREX.com.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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