THE drama over Europe’s sovereign debt might seem good ammunition for American deficit hawks. Not so. As Barack Obama’s bipartisan deficit commission held its first meeting on April 27th, the rising cost of government debt across southern Europe was, if anything, being used to draw a favourable contrast between the American and Greek fiscal positions.
Nevertheless, the American fiscal picture has darkened considerably, thanks to the recession. The projected 2010 deficit, of around 11% of GDP, contrasts with one of 1.2% as recently as 2007, while the net public debt has climbed from 36% to 64% of GDP. These figures look good beside those of Greece, where debt may touch 150% of output by the middle of the decade. There is still enough gloom, however, to trigger concern over the potential for rising interest rates and continued fiscal weakness as America’s baby-boomers start to retire.
The good news is that the deficit is forecast to fall as the federal stimulus unwinds and growth returns.