Macro: The Bottom Line (12/16/2013)

• Congress reaches two-year funding deal

• Politics trumps economic reason ... also in Germany

Congress reaches two-year funding deal: On Thursday, the House of Representatives passed a deal that extends federal-government funding through Sept 2015. The deal, if approved by the Senate this week as expected, would ostensibly spare the country from another round of budget brinkmanship between Democrats and Republicans, at least for the next two years. That alone would be a positive - it's about time that members of Congress end the stonewalling and short-term dealmaking that has plagued the budget process since 2010, and focus on long-term solutions to long-term problems. But it's precisely in addressing these structural problems that the deal falls far short. First, the deal is projected to reduce the budget deficit by a paltry $20 billion - in comparison, the Congressional Budget Office estimates that the US ran a nearly $700 billion deficit in fiscal year 2013 alone. Not to mention that $20 billion is barely a scratch in the national debt, now at more than $16 trillion. Second, the deal does nothing to address the debt ceiling, which will have to be addressed again in 2014, and will likely involve a much nastier fight between the two parties. So policy risk in the US is not entirely banished. But at least Congress has proven that it still understands the meaning of "compromise," even if it means taking only half-hearted measures. 

Politics trumps economic reason ... also in Germany: If you thought political games were the preserve of the US Congress alone, think again - look no farther than across the Atlantic to Berlin. Over the weekend, Germany's two main opposing parties (the conservative CDU and the center-left SPD) overcame the final hurdles to forming a governing coalition. That's right, as strange as it sounds, the two historical rival parties agreed to bury the hatchet and rule together for the next four years. Think of it as portions of the Democratic and Republican caucuses agreeing to form a joint administration. Sounds merry, doesn't it? Well, not when you consider the costs. You see, German Chancellor Angela Merkel (from the CDU) was so keen on sealing a deal, she was willing to concede large chunks of her agenda to the SPD. The result? A shot in the foot for German competitiveness. First, the deal fixes the nationwide minimum wage to 8.50 euros / hour (that's more than $10 an hour)! I guess that's not too shocking if you live in San Francisco, but in certain regions of Germany - particularly the former communist East, where worker productivity is still comparatively low - it will likely lead to job losses. Second, it lowers the retirement age for certain workers to 63. This sets the wrong precedent at a time when Germany is facing unprecedented demographic headwinds. Overall, the deal seems to suggest that German politicians are taking the country's position as Europe's strongest economy for granted. This may be fine for now, but one must not lose sight of the potential longer-term damage. By the time the consequences are felt, it might be too late. Yet another reason to be cautious on the Eurozone's long-term prospects.