Massive US budget cuts could hit Europe

(WASHINGTON) - Massive US budget cuts won't just hurt at home: Their impact could spill over US borders and hit the European Union, America's biggest trade partner.

The International Monetary Fund was the first to raise the alarm about broader ramifications of the cuts, known as as sequestration, set to kick in Friday.

"There will be an impact on global growth," a spokesman said Thursday as the clock ticked down.

In the absence of a political deal, the US federal budget will see $85 billion in cuts through the end of September, as well as $109 billion in cuts over the following eight years -- threatening an American economy that is already barely growing.

Across the Atlantic, the EU also expected to feel the effects.

With the eurozone already dragged down by a recession, a slowing of economic activity in the United States would be an unwelcome development for Europe, said Andras Simonyi, an analyst with the Center for Transatlantic Relations in Washington.

"If the US economy slows down it could have an impact on the trade figures between the US and Europe," he said.

While it is uncertain which sector would be hurt most, "a US slowdown wouldn't be a good news," he told AFP.

The 27-nation bloc even enjoys a comfortable surplus vis-a-vis the world's leading economic power. Bilateral US-EU trade totaled $645 billion in 2012.

Some of Europe's nervousness stems from that very uncertainty of where cuts will be made.

There is "a great uncertainty about the exact fallout from the budget cuts," one diplomatic source told AFP.

The current crisis in many ways echoes the "fiscal cliff" brinksmanship between Democrats and Republicans late last year. After that standoff, EU Economic Affairs Commissioner Olli Rehn urged Washington to sort out its budgetary problems in time -- for the well-being of the global economy, as well as for Europe.

How the budget drama will play out depends largely on the success of deal-making between the Democratic White House and Republican members of Congress. President Barack Obama met with congressional leaders for talks on the sequester Friday, but this was seen more as a photo op than a session to actually get something done.

The drastic sequester cuts were mandated after Democrats and Republicans failed to reach an agreement on budget deficit reduction. Never meant to actually go into effect, they were seen as a means to push rival lawmakers to reach a compromise.

For now, the government agencies overseeing foreign trade risk having their budgets reduced and their room for maneuver and budgets curtailed, at a politically and economically crucial time, with the two trade partners about to embark on major trade talks.

The United States has said it will open talks with Europe to create what would be the world's largest free trade zone and also wants to finalize Trans-Pacific Partnerships with several countries in South America and Asia.

The US-EU Transatlantic Trade and Investment Partnership would liberalize investment and harmonize regulation, boosting economic growth and jobs, according to leaders from the two sides.

The budget cuts could lead to temporary cuts in the numbers of customs officials, which could slow trade from Europe -- especially in the crucial exports of chemical products and transportation equipment.

A spokesperson for the office of the United States Trade Representative in Washington agreed that the effects of the sequester could be felt during the talks.

"The USTR is currently conducting or preparing to launch three major trade negotiations," the official said.

"Sequester cuts may impact these and other market-opening efforts, as well as some enforcement activities."

However, some experts believe that the sequester could have the unanticipated effect of speeding up US-EU free trade talks, which have yet to be formally launched in Brussels.

"This could have an interesting impact as we're getting ready for the transatlantic free trade negotiations," said Simonyi.

"I do think it might have a positive effect. It might even push the US and the EU to figure out how to move faster with the negotiations because this is seen as something that could boost the economy on both sides," he said.