America / Debt / Europe / Fiscal Cliff / Taxes

Cult of Uncertainty: The Catalytic Hysteria Surrounding the Fiscal Cliff in Europe

The attention surrounding the Fiscal Cliff has escalated it from an issue of domestic panic to international concern. While the direct impact of the event involves strictly domestic policies, the resulting uncertain economic forecast stateside has created detrimental consequences for European markets that are reliant on the United States for trade. The suggested calamity results from a series of concurrent tax hikes and governmental spending cuts that would affect GDP immediately through the reduction in government expenditures and more long-term through the increase in taxes. The 4.3% reduction in spending, coupled with the 13-26% increase in taxes on people and businesses, is already estimated to create negative GDP growth of -1.3% for the first half of 2013[1].

While this began as an issue solely affecting the United States and its citizens, the trepidation has begun to impact the major European markets. The United States plays a big role in Europe’s triumvirate powers: the United Kingdom, Germany and France; and as the primary, secondary and sixth largest trading partner of each country, respectively, issues in the United States have a substantial influence on their markets[2][3][4]. Following an announcement on Wednesday by Senate Majority Leader Harry Reid expressing his disappointment with the progress of a compromise, two of mainland Europe’s largest portfolio indices, the FTSEurofirst 300 index and the Euro STOXX 50 index, fell 0.2% and 0.4%, respectively[5]. Contrastingly, both indices rallied 1.13% and 1.2%, respectively, the day following President Obama’s announcement that he is optimistic about an impending resolution[6].

These figures highlight the concomitant that markets are built upon speculation, and thus particular market fluctuations should not be a reason for concern. While the looming issue is very real, the Y2K-like hysteria is sensationally overstated. We are not on the precipice of a worldwide collapse, and we accept the markets’ day-to-day oscillation as political leaders fight for a solution. We must recognize that we are indeed facing a focal point in the history, but the future is now in the hands of Congress.

Further Reading

CBO Report

House Speaker John Boehner speaks on Fiscal Cliff concerns

European Stocks Drop Amid Fiscal-Cliff Concern— Bloomberg tracks effects of the Fiscal Cliff on European markets in real time. Video

[3] Tables/OrderRankGermanyTradingPartners.pdf?__blob=publicationFile