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US likely to avoid fiscal cliff, Europe remains big risk: Flaherty

Economists says political deadlock could shave five percentage points from US output, which is bad for Canadian exports.


October 4, 2012
by The Canadian Press

OTTAWA—Finance Minister Jim Flaherty is optimistic the US will avoid the so-called fiscal cliff that many believe could trigger another recession in the world’s largest economy.

Flaherty says he believes the congressional budget committee will arrive at a compromise on the US$600 billion in tax hikes and spending cuts set to automatically kick in January.

“There are enough members of the budget committee in the current Congress who totally understand the situation (and) I think they appreciate the urgency of the situation,” he said. “This must be dealt with because if it is not dealt with, the effect on US GDP (gross domestic product) will be very significant and that of course directly effects Canada.”

Economists estimate the hit to the US economy from political deadlock on all measures could shave up to five percentage points from the country’s already weak output. Such a shock would impact not just the US, but also Canada through a loss of confidence and demand for exports.

Flaherty said the new president-elect, whether it is Barack Obama or Mitt Romney, will need to show leadership to avoid catastrophe.

Meanwhile, the minister says he is not as convinced that Europe has the wherewithal and the political structure to extricate itself from a long period of economic difficulty.

Flaherty, who will be meeting with his colleagues at the International Monetary Fund-World Bank fall meetings in Tokyo next week, called Europe “the clear and present danger” to the global economy.

But he has not changed his mind about joining the IMF’s emergency bailout fund, despite being under pressure from colleagues to ante up.

Europe is rich enough to deal with its debt problems without the help of outsiders, he said.

Part of the problem is that Europe lacks a single finance minister to represent the entity, which makes speedy action difficult, he said.

“I know my colleagues in Europe are trying to work on it. But the problem is they don’t have a central finance ministry so it’s taking time, but you know, time is finite.”

As for Canada’s economy, the minister said he remains concerned it could be sideswiped by a European crisis. He said at the moment, the economy continues to expand, but modestly.

©The Canadian Press