The upside is that any financial market fallout could pressure both parties into a bargain, according to Deutsche Bank AG economists led by Peter Hooper in New York. After policy uncertainty depressed U.S. growth by a percentage point or more in recent years, a successful resolution could boost expansion by as much as two points, they said in an Oct. 31 report.
Still, Europe isn’t off the hook, as evidenced by a U.S. Treasury official telling reporters on Nov. 2 that it remains the “greatest headwind” to international recovery. While the ECB has calmed markets, Greece’s government will this week try to piece together political support for further austerity needed to keep aid flowing. Meantime, Spain is holding out on tapping a bailout, and there are differences over the speed of a continent-wide banking union.
“We may have to brace ourselves for occasional new waves of crisis,” said Holger Schmieding, chief economist at Berenberg Bank in London.
Japan, which has a debt of 237 percent of GDP, is also facing fresh budgetary challenges. Its Ministry of Finance is warning that a refusal by lawmakers to authorize 38.3 trillion yen ($476 billion) in borrowing risks leaving the government unable to hold debt auctions as planned.
Whether the route to lasting economic recovery lies through austerity or measured stimulus remains an evolving debate within the G-20. Just two years ago, the group’s advanced nations, with the exception of Japan, vowed to cut their budget deficits in half by 2013 and stabilize or reduce government debt as a share of GDP by 2016. IMF forecasts show only Germany, South Korea, Canada and Australia largely on course to meet both goals.
Flaherty said while the G-20’s credibility is at stake if it doesn’t reaffirm its deficit commitments, there may be some “modification” given they may no longer work for the Americans. The IMF forecasts a U.S. budget gap of 7.3 percent of GDP next year versus 11.2 percent in 2010.