Republicans lose budget battle, but US fiscal war may continue

(By Deutsche Welle) In the last-minute deal that averted a default, Republicans won no substantive concessions from the White House. After taking a hit in the polls, the Grand Old Party is licking its wounds and contemplating what’s next.

For more than two weeks, Republicans went to the mat in Washington’s latest partisan fiscal battle in a push to defund President Barack Obama’s signature Affordable Care Act (ACA). But on Wednesday, the Tea Party caucus couldn’t hold the line any longer, with many moderate Republicans agreeing to cut their losses and support a bill to fund the government and raise the debt ceiling through the New Year.

“We fought the good fight, we just didn’t win,” Republican Speaker of the House John Boehner told conservative radio talk show host Bill Cunningham in Cincinnati, Ohio.

Under Wednesday’s agreement, the federal government will receive funding through January 15, while the debt ceiling has been raised until February 7. In exchange, Republicans secured only a token concession, which tightens income verification rules for Americans applying for health care subsidies under the ACA.

“Our drive to stop the train wreck that is the president’s health care law will continue,” Boehner said in a press release.

Although Boehner had encouraged his party to support the bill that the president would eventually sign, only 87 Republicans heeded the speaker’s call and voted for it. In the Senate, where the bill originated, 18 Republicans cast their ballots in favor of the legislation.

“The real question going forward is the same question as this time,” Theda Skocpol, author of “The Tea Party and the Remaking of Republican Conservatism,” told DW. “When will other Republicans, conservatives who want to operate within normal governing procedures, when are they going to stand up to these folks?”

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US dollar’s ‘exorbitant privilege’ at risk as Congress flirts with default

(By Deutsche Welle) The US has brought itself close to another self-inflicted fiscal crisis, with the government in shutdown and Congress flirting with default. The volatility could undermine confidence in the dollar as a safe haven.

Since the end of World War II, international investors have looked at the US dollar as a safe bet, reassured by the full faith and credit of Uncle Sam. In hard times, they parked their money in US Treasury bills to ride out the storm. But these days, Washington is not looking as reliable as it once did to some investors.

With Democrats and Republicans unable to compromise on a spending bill, the federal government shut down for the first time in 17 years. And Republicans have once again used the debt ceiling as leverage in budget negotiations with President Barack Obama, risking a default on US debt obligations, which could have a major impact on investor confidence.

Even a short-term compromise to raise the debt ceiling through the Thanksgiving holidays wouldn’t necessarily stave off the danger. In the summer of 2011, the threat of a default alone provoked ratings agencies to downgrade the US for the first time in history.

“Nobody knows where that can end,” Axel Merk, president of the investment advisory firm Merk Funds, told DW. “We took the risk with Lehman, and it was pretty bad, but I don’t think we’ve seen anything in comparison with what could happen if the US was truly to decide to not pay on time.”

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Obama signs order for painful budget cuts

(By Deutsche Welle) US President Barack Obama has signed an order that starts putting into effect across-the-board budget cuts known as the “sequester” after he and congressional leaders failed to find an alternative budget plan.

Huge spending cuts will start to hit the US starting Saturday after President Barack Obama and congressional Republicans failed to find a compromise budget. Obama signed an order authorizing the cuts Friday night, officially enacting the across-the-board reductions.

With the series of automatic spending cuts, Democrats and Republicans are playing a game of political chicken, with neither party willing to compromise in the latest round of America’s 18-month-old fiscal drama. A last-ditch round of talks between President Barack Obama and congressional leaders ended without a breakthrough. After the talks Obama described the cuts that now have gone into effect as “dumb” and “arbitrary” and warned of the negative impact on the economy and jobs.

The $85 billion (65 billion euros) in across-the-board cuts for fiscal year 2013, called sequestration, will equally impact both defense and social spending. Another $1.2 trillion of austerity will then set in over the next decade. Designed originally as a strategy to intimidate hyper-partisan members of Congress into a compromise on taxes and spending, sequestration was never actually supposed to become reality.

But now, both sides of the political aisle are pointing fingers as Washington prepares to fall on its own sword.

“Unfortunately, it appears that Republicans in Congress have decided that instead of compromising  – instead of taking anything from the wealthiest Americans – they would rather let these cuts fall squarely on the middle class,” US President Barack Obama said in his weekly radio address on Saturday.

Having already agreed in January to postpone the sequester by two months and raise taxes on families earning more than $450,000, many Republicans are unprepared to meet the president’s demands on revenue this time around.

“Most Americans are just hearing about this Washington creation for the first time: the sequester,” John Boehner, speaker of the House of Representatives, wrote in a Wall Street Journal editorial on February 20. “What they may not realize from Mr. Obama’s statements is that it is a product of the president’s own failed leadership.”

According to Ron Haskins, an expert on budget issues at the Brookings Institution in Washington D.C., the parties are unwilling to forge a bi-partisan agreement on austerity because they would be held politically accountable by their constituencies for the economic pain. So they are increasingly prepared to let the sequester go into effect and try to push the blame on their adversaries.

“I don’t think they have really made a rational calculation,” Haskins told DW. “I think that probably the main element in their thinking is that they can blame the other team – that’s what they’re hoping.”

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US, EU debt crisis escalates in the face of political gridlock

(By Deutsche Welle) Long after the bailouts of Wall Street and Greece, the US and EU face an escalating debt crisis. Political gridlock on both sides of the Atlantic prevents the implementation of controversial but necessary solutions.

The United States and the European Union have faced a financial onslaught this summer as stock markets and credit ratings tumble due to declining confidence in the political will of Washington and Brussels to implement the controversial but necessary steps to reduce ballooning sovereign debt.

For the first time in history, the US – the world’s leading economy and only political superpower – has lost its AAA credit according to the rating agency Standard and Poor’s, indicating a deteriorating faith in America’s gridlocked political system and still stalled economy.

In Europe, a debt crisis that began in the peripheral states of Greece, Ireland and Portugal has spread dangerously close to core countries such as Italy and Spain, the eurozone’s fourth and fifth largest economies respectively, placing the very future of the European project in question.

The parallel escalation of the debt problems on both sides of the Atlantic has raised concerns that the global economy could slide back into recession.

“The underlying weaknesses that are also revealed by these crises …have something in common in terms of the difficulty of putting your fiscal house in order,” Jean Pisani-Ferry, director of the Brussels-based economic policy think tank Bruegel, told Deutsche Welle.

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Little sign of progress on US debt deal

(By Deutsche Welle) Negotiations in Washington to raise the nation’s debt limit have faltered on the partisan political divide. Credit rating agencies and Asian countries have warned the US to adopt responsible fiscal policies.

Republicans and Democrats have reached an impasse in an escalating ideological battle over raising the US debt ceiling, with the rating agency Moody’s threatening to downgrade Washington’s credit worthiness if the two sides fail to find a compromise by August 2 – a move that could destabilize the global economy.

“It’s the foundation of our financial system,” US Federal Reserve Chairman Ben Bernanke said during a recent congressional hearing. “The notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.”

Tax increases versus spending cuts

Both political parties agree in principle that the US must increase its $14.29 trillion (9.8 trillion euros) debt ceiling in order to continue paying its bills and avoid a short-term default on its financial obligations. Negotiations, however, have reached a stalemate due to a partisan divide over the appropriate balance between taxes and spending cuts.

Republicans have preconditioned any debt limit increase on parallel cuts in spending while at the same time rejecting tax increases across the board. Democrats, meanwhile, have been reluctant to make cuts in social programs such as Medicare and Medicaid that could alienate their electoral base, proposing instead to raise taxes on wealthier Americans.

Republican House Speaker John Boehner and President Obama appeared on track to bridge the divide through a “grand bargain” that would have included a $3 trillion reduction in spending and $1 trillion in tax increases. Rank-and-file Republicans led by House Majority Leader Eric Cantor, however, rejected the deal due to the tax hikes.

In lieu of the politically risky “grand bargain,” Cantor reportedly called for a short-term solution rooted in spending cuts. Cantor’s proposal prompted Obama to dig in his heels against Republican demands in what has become a volatile game of political brinkmanship.

“The problem is that there is no party discipline,” Josef Braml, an expert on American politics at the German Council on Foreign Relations, told Deutsche Welle.

“Obama can’t get his liberals on board. On the other side, it’s difficult for Republicans to get the Tea Party guys involved because they would commit electoral suicide if they agreed to tax increases.”

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