G-20 tells U.S. to avoid cliff as fiscal focus passes Europe

Hogging Spotlight

A shift from previous G-20 talks is that Europe’s travails are no longer hogging the spotlight as attention is split with the U.S. The IMF estimates the fiscal tightening on track there is equivalent to 4 percent of gross domestic product, the most since the 1940s and about double the U.S.’s current growth-rate.

“In the near-term, clearly the U.S. situation is the higher risk” compared with Europe, Canadian Finance Minister Jim Flaherty told reporters.

Assuming the cuts pass through entirely to the economy, a 4 percent consolidation would be enough to shrink the U.S. economy 0.5 percent next year as well as generate a 2.2 percent contraction in the euro area and limit Chinese expansion to 4.4 percent, according to a model created by Dario Perkins, a former U.K. Treasury official now at Lombard Street Research in London.

‘Austerity Light’

The G-20 members are confident a bipartisan deal can be struck, an official from a G-20 nation said. Even if a worst- case scenario is avoided and the U.S. cuts run a third of the total, the resulting “austerity light” will still be enough to slow the U.S. economy, said Rich Clarida, global strategic adviser at Newport Beach, California-based Pacific Investment Management Co.

Morgan Stanley analysts see a one-in-three chance of a political spat bad enough to cause a U.S. recession. Democrats led by Obama want to allow scheduled tax increases on the wealthy, while Romney opposes any increase as Republicans focus on reducing spending.

Highlighting the growing unease toward the U.S., 42 percent of investors polled last month by Bank of America Merrill Lynch identified the fiscal cliff as the main threat to their strategies, up from 26 percent in August. By contrast, 27 percent branded European debt their main concern, down from 65 percent in June.

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