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Budget crisis

Ben KnightOctober 1, 2013

The US government shutdown has raised the stakes in the deadlock facing the US Congress. It's difficult to see where a compromise may come from - unless some kind of high-profile dealmaker steps in.

The President s Fiscal Year 2014 Budget proposal is delivered to the Senate Budget Committee and distributed to staff, in Washington DC on April 10, 2013. PUBLICATIONxINxGERxSUIxAUTxHUNxONLY Politik Finanzplan Haushalt Staatshaushalt USA xns x0x 2013 quer premiumd 59494385 Date 10 04 2013 Copyright Imago UPi Photo The President S Fiscal Year 2014 Budget Proposal IS delivered to The Senate Budget Committee and distributed to Staff in Washington DC ON April 10 2013 PUBLICATIONxINxGERxSUIxAUTxHUNxONLY politics Financial plan Budget State budget USA xns x0x 2013 horizontal premiumd
Image: imago/UPI Photo

Newspapers around the world struck a note of panic as the US federal government shut down for the first time in 17 years on Tuesday (01.10.2013), after hours of brinkmanship in the US Congress failed to end the budget row.

Germany's Der Spiegel announced that "a superpower has paralyzed itself," while Britain's Guardian newspaper described the last few hours of negotiations as "bizarre and unpredictable."

Apparently convinced that the Republicans were bluffing, the US government did not begin making arrangements for the shutdown until 48 hours before it happened. But there was also a sense of complacency on both sides that may have exacerbated the problem - after all, these tense budget negotiations have become an annual fall ritual in Congress.

U.S. Senate Majority Leader Harry Reid (D-NV) (3rd R) looks at a screen showing a clock counting down to a government shutdown, at a news conference with fellow Democrats Senator Chuck Schumer (D-NY) (4th R), Senator Barbara Mikulski (D-MD) (2nd R) and Senator Dick Durbin (D-IL) (R) after the Senate voted to pass a spending bill in an attempt to avoid the shutdown, sending the issue back to the House of Representatives, at the U.S. Capitol in Washington September 27, 2013. The U.S. government braced on Friday for the possibility of a partial shutdown of operations on October 1 as Congress struggled to pass an emergency spending bill that Republicans want to use to defund the new healthcare reform law. REUTERS/Jonathan Ernst (UNITED STATES - Tags: POLITICS BUSINESS TPX IMAGES OF THE DAY)
Neither party wants to back down, say observersImage: Reuters

Inevitable deadlock

But while the White House may have been holding out for a last-minute deal, some outside observers saw it coming. "It was kind of inevitable that it would happen - neither one of the two parties had any interest in coming to a solution," said Vincent Michelot, professor of American politics at the Sciences Po Lyon, France. "The Republicans needed to demonstrate that they were sticking to their principles. They really wanted to make a point that the government is a waste and that shutting it down is not such a bad thing."

Meanwhile, the Democrats have no reason to back down either. "On the other side, the strategy for President Obama is to hold the Republicans responsible for a downturn in the economy, for holding the government hostage to a relatively small group of people," said Michelot.

In a sense, then, the shutdown was a necessary prologue to the real negotiations. "The two parties are very, very far apart, so nobody knows what can all of a sudden bring them together," added Michelot.

Real talks start now

It seems difficult to see where that compromise will come from, though Michelot has one suggestion - a deadlock-breaching initiative from a high-profile individual. This could either come from someone like Mitt Romney, who has no presidential ambitions to risk - or, more intriguingly, future presidential hopefuls themselves.

"There is a risk, but there's a potential reward too," said Michelot. "There's a risk of appearing as the one who compromised with the opposing party. But the reward is in being the person who is able bring the parties together. Right now, 90 percent of Americans have a negative image of Congress. Somebody who is going to make Congress at least a little bit functional is going to be a hero within his own party and in the eyes of a large number of Americans."

In other words, this would be an ideal moment for an aspiring presidential candidate to change the paradigm of political debate in the US. "It's a situation that is so complex that only through interpersonal skills can one person or a group of people offer a solution."

Global consequences?

The longer the shutdown drags on, the more damage could be inflicted on the economy. Forecasters at IHS Global Insight have calculated that the stalemate will knock as much as $300 million (222 million euros) a day off US economic output (based on the fact that total US nominal output was around $16 trillion last year). This, many European newspapers worried on Tuesday, would have consequences for the rest of the world.

US Speaker of the House John Boehner speaks to the media at 1:00 am immediately after the House of Representatives voted to send their funding bill with delays to the "Obamacare" health care act into a conference with the Senate, prompting a shutdown of portions of the U.S. government in Washington October 1, 2013. The U.S. government began a partial shutdown on Tuesday for the first time in 17 years, potentially putting up to 1 million workers on unpaid leave, closing national parks and stalling medical research projects. REUTERS/Jim Bourg (UNITED STATES - Tags: POLITICS BUSINESS)
House Speaker John Boehner is a key actor in the crisisImage: Reuters

Nils Jannsen, economist at the Kiel Institute for the World Economy (IFW) doesn't think things will become too drastic yet. "It's a bit of an exaggeration to say that it will affect the entire world economy, but it depends a little on how long this situation lasts," he told DW. "If it last for three or weeks, then of course the effects could become more threatening."

Jannsen predicted that since the pressure on the two opposing parties would grow each day that there was no agreement, the shutdown would be unlikely to last that long.

But the scarier deadline is still looming - October 17, when the US is set to reach its debt limit. Unless stopgap legislation is passed by then, the US government will be unable to borrow any more money. Essentially, it will mean that the US Treasury will lack the legal power to borrow any more money to close the gap between spending and tax revenue.

Unlike the shutdown, this has never happened before, so the consequences are unpredictable and the markets more jittery. "The nervousness of the financial markets will likely increase as that deadline approaches," said Jannsen. "And the uncertainty of investors in US companies will increase with it. That certainly could be transferred to the world economy."