Economic Outlook: Banking on austerity

By ANTHONY HALL, United Press International  |  Oct. 28, 2010 at 9:32 AM
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If Washington requires examples of what combination of taxes and spending to toss in the air, rest assured Europe can likely provide one or two.

Ireland, Spain, Portugal and Greece each bolstered investor confidence during the summer by announcing austerity spending plans. Britain is still adjusting its budget to deal with ballooning debts in the post-recession reality. In the United States, with an election looming, austerity is not in fashion, quite, but lawmakers are already planning for the potential new profile on Capitol Hill to include more Republicans, including members of the Tea Party where the economic rule of thumb is bring your own tea bag.

At issue is the George W. Bush-era tax cuts that President Barack Obama has said should not be preserved for the wealthiest 2 percent of taxpayers, those making more than $200,000 per year individually or $250,000 per year as a family. If numbers turn sharply on Nov. 2, the tax cuts and a variety of spending priorities will likely shift. Ignoring the torpedoes, "I don't think the American people are electing a new generation to Washington, D.C., in hopes that Congress and the White House can get along better," Rep. Mike Pence, R-Ind., said.

Turning the focus back to Europe, The New York Times reported Thursday Greece is likely to fall short of the goal set by the International Monetary Fund and the European Union to reduce its budget deficit to less than 8.1 percent of gross domestic product this year.

Agreeing to the reduction was a key stipulation attached to an IMF-EU loan of $150 billion. Greece, in the interim, appears to have made a good faith effort to address its fiscal crisis: It is falling short simply because tax revenues in a slumping economy are not covering the bases.

As one country after another throughout Europe hit the wall last summer, even for some that did not (France and Germany), governments turned midstream from providing extra stimulus to their economies to slamming on the brakes. That works well if confidence rises enough to increase investments, but even that has slipped lately with Greek 10-year bond yields climbing to 10.3 percent Wednesday after dropping from 11 percent, mid-crisis, to less than 9 percent in September, the Times said.

Austerity measures are part of a dynamic formula; they are not a magic formula for an economy that has cooled down to just embers.

"All the leading indicators for the peripheral economies are negative," Variant Perception economist Jonathan Tepper said.

"People tend to forget that when you are in a deflationary dynamic, your tax take will be going down."

On international markets Thursday, the Nikkei 225 index in Japan fell 0.22 percent while the Shanghai composite index in China dropped 0.15 percent. The Hang Seng index in Hong Kong rose 0.2 percent while the Sensex in India fell 0.32 percent.

The S&P/ASX 200 in Australia rose 0.79 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.96 percent while the DAX 30 in Germany gained 0.97 percent. The CAC 40 in France rose 1.07 percent while the Stoxx Europe 600 gained 0.83 percent.

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