While attention on this side of the pond has been focused on the sequester, the spending wars continue in Europe. Last week Moody’s stripped the British government of its AAA credit rating (The Guardian) The agency noted:
The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public and private sector deleveraging process.
Deleveraging refers to Chancellor George Osborne’s attempts to curtail deficit spending via an austerity program. But austerity is painful, taking money and demand out of the economy while the balance sheet is being fixed. The British dilemma illustrates the Keynesian trap of the modern welfare state: it overspends in good times (most notoriously in the final years of the Labour government), leaving nothing but a painful hangover and even more painful choices when times go sour.
The downgrade shook the currency markets and caused a run on the pound. But while the currency markets will no doubt regain their equilibrium, the British taxpayer is getting “no end of a lesson”, to use Kipling’s phrase, about the illusion that governments can create prosperity.
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From Yahoo News:
WASHINGTON (Reuters) – Top lawmakers aiming to reach a deficit-reduction deal agreed on Thursday to step up the pace of their talks with a series of meetings next week but said they still disagreed over the need to raise taxes.
Vice President Joe Biden and six leading Democratic and Republican lawmakers have now met a half-dozen times as they try to work out their differences and reach a deal to reduce trillion dollar budget deficits.
Thursday’s Capitol Hill meeting took place amid growing pressure at home and abroad for an agreement that would let Congress raise the $14.3 trillion debt ceiling before an August 2 deadline, when the Treasury Department has warned it will run out of money to pay the nation’s bills.
So far, bond markets remain placid, reflecting investor expectations that a deal will come before August. But Wall Street has stepped up warnings that the picture could change as the deadline draws near and some lawmakers talk of forcing a brief default on debt to secure deeper spending cuts.
In the past few weeks, three major credit rating agencies have warned they may downgrade the ratings on Treasury bonds if the debt and deficit standoff is not resolved soon. Moody’s said it wanted to see substantial action by mid-July.