Agreement in Washington?

To the United States’ main creditor, China, the budget agreement that has come to Democrats and Republicans in hopes of avoiding bankruptcy seems too political, lacking appropriate background measures. China’s opinion, a country that has more than $1.1 trillion in U.S. debt, is relevant and reflects the reality of the situation.

The negotiations that led to this agreement, and which have kept the world in suspense until the last moment, have been chaired by the electoral interests of the two major parties, rather than by the genuine desire to tackle the huge mountain of public debt that is hampering economic growth. We must remember that these electoral maneuvers have occurred many times in the U.S., up to more than 70 times throughout history, but never with a volume of public debt as high as it is today.

Nevertheless, China itself and the entire world breathes a sigh of relief that the world’s largest economy avoided bankruptcy, as Obama announced Sunday and was ratified by Congress—without a surprise—last night. There is no doubt that the agreement has averted the risk of a new and severe global recession.

The agreement calls for the extension of the debt ceiling by $2.1 trillion, up to $14.3 trillion, with the additional commitment to address adjustment measures of spending by $2.5 trillion over the next 10 years. This cut will be done in two phases. The first, for a value of $1 trillion, will not take into account the increase of taxes. The details of the rest of the adjustment, for a value of $1.5 trillion, were left to a bipartisan commission to be agreed before Nov 23.

There is no sign, in view of the text of the agreement, of the adoption of major structural reforms to address the endemic debt, nor the taxation of the wealthy and large corporations, as president Obama had hoped. Obama strongly advocated avoiding bankruptcy, as indeed it would have been a global financial catastrophe. There has, therefore, been an almost total capitulation to the demands of the extremist Republicans led by the Tea Party. The majority of the sacrifice, therefore, will likely fall onto the middle and lower classes, thereby penalizing the consumer — the great engine of the American economy.

Financial markets, after the initial euphoria about the announcement of the agreement, recorded declines considering that the weakness of U.S. growth, in light of new available data, will further reduce compliance with the agreed plan of adjustment. Financial rating agencies even threatened to lower the quality of U.S. debt, which will be a huge blow to the U.S. and to international confidence.

Neither Democrats, of course, nor Republicans, will be satisfied with the budget agreement and its performance. The tough struggle between the two parties has brought to the surface, in front of the entire world, the economic and political weaknesses of the most powerful country in the world. It has avoided a serious crisis, but the U.S. image has been left damaged.