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The agreement that re-launches the global economy

· Obama announces an American debt deal ·

With the agreement reached yesterday between Republicans and Democrats, America has avoided technical default and breathed life into the world economy. Now, Congress must approve the deal. At the political level, the more moderate fringes prevailed, with the consequent isolation of radicals (The Tea Party and the liberal democratic wing). The Stock Market responded positively: Asian markets closed slightly up and European markets show encouraging results. Gold prices are dropping, after a record high in the last few days. Oil prices rose to more than 97$ a barrel.

The agreement on the debt ceiling avoids the risk of default and assures an immediate reduction in the deficit. “It will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy,” said President Barack Obama.

In detail, the agreement calls for spending cuts of $1 trillion. The President is authorized to increase the debt ceiling by at least 2.1 trillion dollars, “eliminating the need for further increases until 2013.” A bi-partisan commission will be set up to determine additional cuts of 1.5 trillion dollars. The commission will have to make its recommendations before November 23rd and Congress will vote on them by December 23rd. If the commission does not identify cuts, automatic mechanisms for reducing spending will be enacted, as of 2013, to avoid possible negative repercussions on the economy.

The agreement, therefore, aims to attenuate the uncertainty of the economic climate until 2013. “Assuring an increase in the debt ceiling of at least 2.1 trillion dollars, the agreement removes the possibility of default and offers an important reassurance for the economy at a delicate time,” explained the White House. More than 900 trillion dollars will be saved in ten years, with a ceiling on discretionary spending.

At the moment, one result has already been obtained: all of the principle stock markets are responding well, demonstrating that faith in America has returned. After a very positive start, European markets moderated their run. Now all eyes are on the ratings agencies: a debt agreement might not save the triple A rating of the United States, they have said in the past few weeks. The ball now passes to Congress, with the votes in the House and Senate. The vote will be a test for House Speaker, John Boehner, who fought to keep the Republican majority under control, even though his plan was rejected.  If Boehner has to count on Democratic votes and if he loses more than half of the Republicans, he will have avoided default but put his leadership at risk. A precarious equilibrium: only two days ago Boehner’s difficulties emerged with force: when he was forced to delay several times the vote on his debt and  deficit reduction plan for lack of votes, with a Republican majority in the House that was very influenced by the Tea Party. On the Democratic front, Nancy Pelosi is waiting to decide whether to support the agreement or not. And even here, there are tensions.

The road could be easier in the Senate. Democratic leader, Harry Reid, may need Republican votes. Still, Mitch McConnell, Republican leader in the Senate, maintains that the agreement will be able to find many votes. If the agreement is approved with a bi-partisan vote in the Senate, pressure on the House will increase and approval might become easier.




St. Peter’s Square

June 17, 2019