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Tuesday, May 03, 2011

Lessons from Europe

Last week, Open Europe participated in a discussion in Washington DC hosted by the Heritage Foundation, looking at the debt and deficit spiral haunting both the US and Europe. The discussion can be viewed here.

In a note published last week, in tandem with the Heritage Foundation’s Sally McNamara and J.D. Foster, we also outlined ten economic lessons from Europe. We noted,
The primary lesson from the Eurozone sovereign debt crisis is that running large deficits and accumulating debt with no indication of changing will always translate into higher interest payments and likely higher interest rates, meaning more tax revenue will be consumed just paying for past fiscal sins. Greece, Ireland, and Portugal are now facing interest rates of 13 percent, 10 percent, and 9 percent, respectively, and still face the very real possibility of defaulting.

The U.S. is on dangerous ground by not tackling its current and future deficits with enough urgency. The Obama Administration seems to be relying on markets continuing to provide it with near unlimited liquidity at reasonable rates. But this cannot last forever. Even absent a fiscal correction, interest rates are widely expected to rise substantially in the next few years as the global economy rebounds. For example, the Administration forecasts a rise in the 10-year Treasury rate of 230 basis points. Add in the ongoing deficits, and investors will eventually give the United States the Irish treatment, raising the cost of borrowing much more.

Read the full note here.

1 comment:

Anonymous said...

Excellent recommendations for the U.S. There is no substitute for fiscal discipline. The U.S. cannot rely upon being provided with unlimited liquidity by the rest of the world. The time for action is now.