Stocks in Europe rally in relief after months of increasing concern over US economic recovery
After marathon last-minute negotiations, the US Congress passed legislation to avert the fiscal cliff – a package meant to avert the broad tax increases and spending cuts that would have come into effect with the passage into the New Year – to avoid a sudden hit to the struggling US economic recovery.
The fiscal cliff, which was to take effect on January 1 of this year, would have plunged the US back into recession, driving down stocks, stymieing consumer spending and prompting layoffs across the nation, according to economists. The fiscal cliff had been weighing on investor sentiment across the globe for several months.
‘One thing that I think hopefully the new year will focus on is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much,’ US President Barack Obama said in a press conference after the deal was announced. The president added that he plans to sign the bill.
Stocks in Europe rallied after announcement of the deal, with the Stoxx Europe 600 Index rising 1.73 percent in the first two hours of trading, its highest level in more than a year. The FTSE 100 broke through the 6,000 point level and Germany’s DAX was up more than 2 percent. France CAC 40 was up almost 2.2 percent.
As recently as late December, 47 percent of investors in the December Bank of America Merrill Lynch (BofAML) global fund manager survey cited the fiscal cliff as the most significant ‘tail risk’ on the horizon.
The fiscal cliff started to appear as a primary concern of investors, weighing down equities, as early as September. In that month, the fiscal cliff overtook the Eurozone sovereign debt crisis as the chief concern of investors. According to the September BofAML survey, some 35 percent felt the fiscal cliff was the biggest risk, while 33 percent cited the European sovereign debt crisis.
The package to avert the fiscal cliff, approved in the House in a 257 to 167 vote, etches into permanence the tax cuts carried out in the administration of George W Bush for couples earning less than a combined $450,000 a year and individuals earning less than $400,000 a year.
The taxes for the higher wage earners, which was a compromise from Obama’s goal of keeping higher taxes for citizens earning more than $250,000, are expected to earn the government $620 bn over the next 10 years by paying a tax of 39.6 percent.
The package also leaves untouched the $5 mn threshold for paying estate taxes, extends child tax and tuition credits, and omits an extension of the payroll tax holiday, meaning workers will see a drop in take-home pay this year.
In a press release, the White House labels the package a ‘victory for the middle class’ and says the package takes ‘steps that together will prevent the typical family of four from seeing a $2,200 tax increase next year.’
