Dangers Remain despite the Budget Agreement

Due to its gargantuan economic potential, the United States has a history of recovering from military and financial blunders. But while this may not be the last one, few missteps have discredited it as much as the patched-together solution to the public debt crisis which was just approved. The most logical solution was President Barack Obama’s initial proposal of raising the debt ceiling in exchange for a fiscal adjustment balanced between tax increases and spending cuts. The weakness and lack of leadership by the president, whose Democratic Party has lost its previous majority in the House of Representatives, obliged him to cut a deal with the opposition Republican Party, in the midst of an attack of petty politics that tarnishes the reputation of the planet’s most powerful nation.

Although the formula that was agreed on put to rest the ghost of the unthinkable partial default and calmed the financial markets, its adverse effects will be felt for a long time, both inside and outside the United States. In exchange for a 15 percent increase in the debt ceiling, Obama was forced to give up his bid to increase taxes on the most privileged sectors and to accept instead massive cuts in public spending. This reduction, which is greater than the amount of the debt ceiling increase, will restrict social services in health care, education and unemployment benefits, punishing a group which has been suffering from an unusually high unemployment rate — currently at 9.2 percent — since the crisis caused by the bursting of the mortgage bubble began at the end of 2007.

The fact that the congressional plan worsened the prospects of millions of Americans already under pressure from the slow and uneven economic recovery, led legislators from Obama’s own party to vote against it. But its questionable effects go still further. It showed Republican legislators taking advantage of their majority to defend minor political interests and play based on future electoral calculations. In particular, the tea party, the party’s right wing, blocked Obama’s initial proposal with no justification. But above all, the convoluted negotiating process demonstrated a deep erosion of mature leadership capability in the political system, from presidential authority to the functioning of the parties.

The consequences are no less serious outside of the United States. The cutbacks in public spending will further reduce America’s diminished capacity for consumption, which, together with the crisis affecting various nations in the European Union, will affect the countries that export to these two largest economic groupings in the world. The weakness of the dollar will aggravate the inflationary threat in emerging countries with revalued currencies, such as Brazil and Uruguay. And the largest holders of U.S. bonds, especially China, and in our region, Brazil, will see the value of these investments drop. Everything points to a period of global turmoil which Uruguay will not escape, since our current strong economic growth is closely linked to export markets of uncertain future and to foreseeable monetary vicissitudes.