Important decisions on financial policy are due in the USA in the coming weeks. Without the consent of the Republican majority in the House of Representatives, the government can neither determine the budget for the coming fiscal year, which starts in October, nor raise the debt limit (which is due to be reached during the course of October). Any non-agreement in either case could have a noticeable economic impact; this is especially true of the debt limit.
However, particularly against this background it is very likely that an agreement will be reached just in time, as has been the case with comparable negotiations in recent years, as no party wishes to be held responsible for the effects of non-agreement. "Nevertheless, the tough negotiations, which are sure to be carried out until the very last second, are very likely to have a negative effect on the economy, at least temporarily. The tougher they are, the greater the insecurity and the worse the investment climate," says Nils Jannsen, USA expert in the forecasting centre of the Kiel Institute for the World Economy (IfW). "This is utterly avoidable and therefore very annoying," Jannsen continues.
If no agreement is reached on the federal budget, a so-called "government shutdown" would take place from October, 1. The government would concentrate temporarily on only its most essential tasks; many public servants would remain unpaid for the time being and authorities would close down. Current estimates for the direct economic impact of a "government shutdowns" indicate a minor negative effect. If it lasts a week, for example, gross domestic product would probably decrease by 0.1 percent.
However, aside from the direct impact of a "government shutdown", indirect effects can also burden the economy. Insecurity among private households and companies is sure to increase in line with the duration of the negotiations, on the one hand as to whether any agreement will be reached at all and on the other hand with regard to which political measures (e.g. spending cuts or tax increases) will be attached to such an agreement. This might result in private households refraining from making larger purchases in the near future, and also to a reduction in investment by companies.
Overall, a "government shutdown" certainly would have a negative temporary effect on the economy, albeit to a manageable extent. In that respect, no noteworthy knock-on effects are expected for Germany or the Euro zone.
Far greater risks are threatened if the two parties cannot agree on an increase in the debt limit, which will probably be reached by the middle/end of October. In the worst case this could lead to a "technical default" if the USA can no longer service its debt within the deadline. This could shock not only the national but also the international financial markets.
"In all, however, we expect that agreement will be reached in sufficient time, both with regard to the budget for the coming fiscal year and also the raising of the debt limit," summarises IfW researcher Jannsen. However, the negotiations are likely to last until literally the last second, thus leading to an increase in insecurity, to spending cuts, and possibly also to tax increases. Against this background, Jannsen expects a subdued economic situation due to the US fiscal dispute, which will last until the coming year.
