As Worst Euro Fears Fade, US ‘Fiscal Cliff’ Looms

The euro zone has stepped back from the brink of disaster for now, but the global economy could soon be staring into another abyss if U.S. politicians fail to head off $600 billion in automatic austerity that all but guarantees a new recession.

The long-term fate of the single currency [EUR= 1.2943 0.0013 (+0.1%)] remains unclear, but nerves have calmed since the European Central Bankpromised on Sept. 6 to act as the buyer of last resort for Spanish and Italian bonds.

Now, exactly six weeks before the U.S. general election, fiscal gridlock in Washington is coming back on the global economy’s risk radar.

If opinion polls hold steady and prove accurate, President Barack Obama, a Democrat, will defeat Republican Mitt Romney on Nov. 6. The House of Representatives is likely to stay in the hands of the Republicans, who have a chance of seizing control of the Senate.

On the surface, with power split, that could make it harder to avert $600 billion in spending reductions and expiring tax cuts, equal to 4 percent of gross domestic product, that will kick in at the start of 2013 unless a deal is struck to shrink the U.S. budget deficit by at least $1.2 trillion over the next decade.

“The level of political partisanship in Washington is higher than it’s ever been, and that it is making it much harder to deal sensibly with some of the economic and other problems America is facing,” said Xenia Dormandy, a senior fellow at Chatham House, a think tank in London. “The American system is designed to have checks and balances and that’s what’s happening. But it does mean that in times like this, when strong responses are needed, they’re not forthcoming.”

The consensus among U.S. and other politicians, policymakers, and businessmen at a recent conference organized by Oxford Analytica, another research group, was that Washington would avoid plunging off the “fiscal cliff” — or at least falling all the way down.

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