Lagarde: "Fiscal Cliff" Is Greatest Threat to US Economy

The really big threat to the U.S. economy is not the crisis in the Eurozone, but the “fiscal cliff.” That’s the warning issued by the International Monetary Fund’s president, Christine Lagarde, who warns the White House and the U.S. Congress of the risks that the U.S. economy runs if they’re unable to reach an agreement on a plan to reduce the deficit — a plan to avoid automatic increases in taxes, and spending cuts, starting at the beginning of next year.

There are only 24 days to the fateful deadline, and negotiations between the Obama administration and Republicans on Capitol Hill are still on the high seas. It’s a stall that resembles the disastrous negotiations over the debt ceiling in the summer of 2011, which cost the U.S. its prestigious “Triple A” credit rating by Standard and Poor’s. But now, if it’s really teetering on the brink of a fiscal cliff, the specter of a new recession in the U.S. has got to be just around the corner — right when the economy is recovering and unemployment is falling.

The U.S. economy “is less vulnerable to what happens outside, for instance in Europe,” Lagarde wanted to clarify in an interview with CNN, urging America not to hide behind the difficulties of others.

“I’m not saying that there will be no consequences out of a crisis that could happen in Europe. But the consequences would be relatively minor.” So, for the Director General of the IMF, the United States “is more exposed to its own difficulties and to its own issues than to what happens elsewhere in the world.” The appeal, sent to all parties at the negotiations table in Washington, therefore, is to achieve “a balanced approach that takes into account both increasing the revenue, which means, you know, either raising taxes or creating new sources of revenue, and cutting spending.”

President Obama has so far presented a plan to reduce the deficit by $2 trillion dollars in 10 years, based largely on an increase in taxes, especially on the rich. The expected Republican counteroffer is a $2.2 trillion-dollar deficit reduction, which will instead be based mainly on cutting public spending without increasing taxes on higher incomes.