The potential tightening accounts for 4 per cent of GDP and, if effected, it will plunge the US economy into a recession. Negotiations to avoid this “fiscal cliff” are underway. It is scarcely possible to find a solution without addressing the long-term problems linked mainly to demographic change. The financial markets constantly reflect the changing prospects of reaching a compromise.
In some of the most heavily indebted countries, unemployment has reached alarming levels. Public opinion often ascribes this to the consolidation of public finances. But actually, there is no real alternative to consolidation. Sustainable public finances are a condition for reducing the rate of interest on government debt to an acceptable level. Sovereign default is not an attractive alternative.