FORTUNE – As Europe’s debt crisis escalates, one would assume that the troubles abroad would make the U.S. work quicker to solve its own fiscal problems.
The peripheral nations of the euro zone are far worse off than the U.S. But given that this country’s debt is rapidly rising, many have wondered if America might be heading down a similar rocky path.
But no one in Washington seems to feel any urgency to stop it. By next week, a committee of six Democrats and six Republicans are supposed to agree on at least $1.2 trillion of deficit reductions or else face automatic cuts of that size to defense and other spending in 2013. So far, members have been slogging through negotiations, with little movement over the critical issue of tax revenues.
And although the committee’s staunchest conservatives have softened their anti-tax stance, hoping to prod Democrats into agreeing to deep government spending cuts, many wonder (and doubt) if that will be enough to make the group’s deadline. But this probably comes as little surprise, given the political gridlock over the summer that led Standard & Poor’s to downgrade the U.S.’s stellar triple-A rating.
So why isn’t the European debt crisis having more influence over Washington’s decisions? Here are three reasons:
Europe’s problems feel too far away
U.S. stocks may slump on worries that Europe’s debt crisis could get worse, but the problems still seem too far away for most Americans.
To be sure, the implications of a big disorderly default of any euro zone nation are uncertain. The worry is that it could cause consumer confidence to plummet, which would weigh on the broader economy. But so far, even as some say Europe’s debt crisis has entered a dangerous new phase with larger economies increasingly under financial distress, U.S. consumers don’t appear to have responded much.
The U.S. Commerce Department earlier this week reported better-than-expected retail sales, which rose 0.5% in October compared with the previous month.
“Europe is too far away from the American households to get them to cancel the Disney World trip,” said Federal Reserve Bank of St. Louis President James Bullard Thursday on CNBC.
What’s more, since Europe’s troubles have been brewing for more than two years, U.S. financial institutions have had more time to safeguard from a repeat of the sudden collapse of Lehman Brothers in 2008 that caused credit markets to freeze.
“If it blows up in a big disorderly way, which is what everybody is worried about, then that could come back to haunt the U.S.,” Bullard said. “If it just kind of tumbles along for a long period of time, which is the most likely outcome, then I am not sure you would get much feedback to the U.S.”
So perhaps members of the supercommittee would worry more about Europe if only their constituents did.
The trigger isn’t that scary
Europe’s debt crisis may have swung global markets, but that doesn’t pressure the supercommittee to get its fiscal house in order quicker. It’s true that failure of the group to make the minimum cuts may trigger more alarms about political gridlock. But the response likely won’t rise to financial panic if members can’t reach a deal by deadline.
That’s because the law allows for $1.2 trillion in spending cuts – the minimum which the credit rating agencies are asking for – to automatically kick in. The so-called “trigger” was intended to force both Democrats and Republicans to reach a deal, since the cuts include a combination of defense cuts (which Republicans and some Democrats don’t want) and cuts to domestic programs (which Democrats don’t want). But it seems as though the set-up merely breeds inaction.
And members of the committee could further delay the automatic cuts. As the Washington Post’s Ezra Klein has noted, Rep. Jeb Hensarling, the Republican co-chair of the supercommittee, has talked about changing the back-up cuts if the group can’t come to an agreement. Procedurally, however, that’s easier said than done. The maneuver would require both parties of the supercommittee to agree on the changes. And as Klein added, that’s almost as hard of a task as to come up with a deficit deal in the first place.
Europe’s debt problems help make borrowing in the U.S. super cheap
Adding to the lack of urgency is the cost of borrowing in the U.S. One of the perplexing aspects to emerge from Europe’s debt crisis is the fall in yields on U.S. bonds. As investors view Europe with confusion and uncertainty, yields on bonds of the peripheral euro zone nations have generally soared as investors look to the U.S. Treasury market and others as safe places park their money.
For instance, just last week when Italy’s sovereign-debt crisis heightened, yields on 10-year bonds slid back under 2%. Meanwhile, Italy was forced to pay more than 7% on issues of debt, the level at which other troubled euro zone nations began scrambling for bailouts.
So it’s no wonder the supercommittee doesn’t appear that worried about Europe so long as the U.S. can continue to borrow relatively cheaply. But that short-sighted strategy may come back to haunt it.
