While the chances of the Republicans still playing hard-ball cant be completely ruled out in the US, the turnaround has really been driven by the sharp revival in the housing marketso, after four years of austerity, just 16% of household budgets in the US are devoted to debt service as compared to 19% in 2009, freeing up a lot of money to spend. It helped that sensible policies like those which encouraged fracking have, according to a calculation by Reuters Breakingviews, resulted in energy savings of around $926 per householdto put this in perspective, the tax impact of the fiscal cliff not being resolved would have been higher taxes by $3,446 per household. The overall revival, needless to say, was the result of a very sharp government response even though recently-released Fed transcripts of 2007 suggest it failed to appreciate the severity of the crisis initially.
It is in Europe that the real problem lies. Paolo Manasse of the University of Bologna brought this out quite starkly in his column Eurozone crisis: It aint over yet (FE, January 22) when he pointed out labour rigidities in Europe have prevented the appropriate level of restructuring from taking placeso, after a sharp hike in unemployment, this has fallen in the US while it continues to rise in the eurozone. As a result, while US 2012 output is above 2006 levels by 7%, that in the eurozone is up only 2%. As Manasse points out, the expansionary stance of the government as well as the size of the central banks interventions have been much smaller in the eurozone even though the fall in output has been higher. Part of the problem, as the IMF admitted in a mea culpa by its chief economist, was that economists underestimated the impact of contractionary fiscal policies. Hopefully, with the lesson learnt, the world can move on. The state election that Chancellor Merkel lost over the weekend puts a bit of a shadow over that since the future of Europe will depend on how she fares in the September general elections.