Wednesday, June 7, 2023

Mismanagement of US debt ceiling could slow down EU due to delay or short default

Francois Renaud (Edmund de Rothschild AM) | What are its risks to the global economy if the United States cannot raise the national debt ceiling? Is it a possibility? Because

If the United States is unable to collect it, it would mean in the first place that the Treasury resorts to extraordinary measures to limit spending. The real risk lies in the inability of Republicans and Democrats to find a compromise, which could mean a short or long default. While this is a remote risk that may never happen, the risk is potentially higher today due to the current political climate in the United States. White House estimates of economic impacts range from -0.3% to -6.1% annual US real GDP growth in the third quarter of 2023. Considering that the US represents 15% of world GDP, the impact could increase to -0.9% in the most severe scenario, although most likely unlikely.

What could be the consequences for the EU of mismanaging this situation?

The EU may be indirectly affected by the recession due to a delay or brief default, but with a limited impact. In a severe scenario, the consequences due to the crisis of confidence associated with a default should be much more substantial and could accelerate the timing or worsen the strength of the recession.

Broadly speaking, what are the main differences between the way the US manages debt and the way EU countries do it? Is there something like a US “debt ceiling” in the EU?

In the European Union, debt management differs from the US debt ceiling. There is a process in which the EU reviews each country’s provisional budget to assess its compliance with the European debt limits and, above all, its potential to return to the guidelines, as most countries do not adhere to them. Honor today A country’s refusal to change its budget to comply with the rules can result in monetary sanctions, which have never been activated in practice despite numerous non-compliances.

Nation World News Desk
Nation World News Desk
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