Following the first Presidential Debate, it is easy to get lost in the details. What is clear is that there will be a strong economic recovery, but with unemployment still over 8%, economic growth will slow down and inflation will likely remain high, making it harder to reduce household expenditure.
As a result, the European Union will look to the United States to support it financially in the years to come. President Obama will certainly offer support through both tax incentives and trade deals, but it may take a little longer than expected.
The United States will face an uphill struggle in trying to negotiate better economic recovery, especially if the Europeans are unwilling to cooperate. In fact, the Europeans are unlikely to offer much help. They are not convinced that the US has the economic strength necessary to help the European economy. The UK on the other hand, will struggle to gain much in terms of help.
This is where the G20 could step in and play its role in the recovery process. Many leading world economies, including the United States, will be attending the World Economic Forum in Davos, Switzerland in the coming weeks. Although not as well known as the Olympics or the G8, the WEF plays a vital role in determining global policy.
If President Obama was to use the WEF to pressurise the EU to agree to help, it may take some convincing. One thing is for sure; President Obama will want a strong response from Europe. This may push Europe towards providing more support to the US in terms of both financial and trade assistance.
However, President Obama will be forced to make clear that the European Union will not benefit from a policy of budgetary restraint or tax breaks, which could put it at loggerheads with the EU’s Commission. If this does happen, there will be a greater chance of the EU and US backing off of the negotiating table completely. There could also be a breakdown of the negotiations.
This scenario would mean that there would be less money available for the government to provide further support for economic recovery. in the years to come. The best case scenario is that the US will continue on the same economic recovery path that it has taken, however the result would be less support than they need. to provide significant assistance.
To ensure that economic recovery is sustained in the future, the US is likely to need to look to the European Union for assistance to avoid the prospect of recession or worse still, bankruptcy. It is clear that the G20 will not be the only group to step up to the plate in this regard.
The European Union could provide assistance to the United States and other nations through the creation of a European Financial Stability Facility (EFSF). It is possible that it will do so by issuing bonds, but a lot of work lies ahead.
If the European Central Bank was to provide credit to European banks and lenders, then the credit rating of those banks and lenders would become far more secure. If this happens, the risk factor involved will be reduced. but it would be far more complicated to administer than creating an EFSF of any sort.
This may also mean that the UK is left isolated during an economic recovery. with no one else is stepping up to the plate to provide economic support, as many others are unwilling to join the efforts.
It is not clear how much of this scenario the G7 and the EFS will be prepared to accommodate. The G7 is unlikely to take the step it is about to take. and is likely to remain a rather haphazard player in the recovery process.