It is starting to sink in that October 17 is not a hard deadline for default by the U.S. government on its obligations. Senator Corker for instance says “I think the real date is around the first of November.” Some of the talk of later dates is posturing by the president’s opponents seeking leverage in the negotiations, and their willingness to go so close to the edge of the cliff is disturbing. But it also reflects the real uncertainty about when the debt limit will cause serious economic and political distress. It is worth examining whether November 1 is a drop dead date for negotiations.
Over the past year, Europe has enjoyed calm financial markets. At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes” to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program). Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks. It may be time to question that optimism.