Meanwhile, Away From Washington

With so much going on in United States’ fiscal policy, it can be difficult to focus on much more than what is happening in Washington -- at least we feel that way. But if you haven’t noticed, the fiscal and economic outlook overseas has taken a hit in recent weeks as well, leading to a number of downgrades, talks of mandatory balanced budgets in the Eurozone, and a good deal of volatility in markets around the world.

Wednesday, Moody’s – one of the ‘big three’ ratings agencies – issued a downgrade of Japan’s sovereign debt, bringing them from Aa2 to Aa3 (with a stable outlook). This brings the Moody's rating on par with Japan's ratings from Standard and Poor’s (S&P) and Fitch, both at AA- (though S&P and Fitch have Japan on a negative outlook).

In France, many have argued that the U.S. downgrade by S&P portends a French downgrade as well. To better their fiscal picture, French President Nicolas Sarkozy recently announced a series of spending cuts and revenue increases for the remainder of 2011 and 2012 aimed at hitting the country’s deficit reduction targets. However, some have argued the underlying economic assumptions (specifically 1.75 percent growth each year) are overly optimistic, suggesting further cuts may yet be necessary.

France isn’t the only one rumored to be near a potential downgrade. As an example of just how high tensions are and how volatile the markets have been lately, rumors of a coming downgrade of German debt and of the country being set to ban the short-selling of stocks caused European markets to tumble dramatically Thursday, only to find out later the rumors were seemingly unsubstantiated.

And we haven’t even mentioned the downgrade to Ireland’s debt by smaller rating agency DBRS. Ireland saw its rating brought down from A to A (low) last week, while the Canadian rating agency also put Spain on a negative outlook (though reaffirming its AA rating).

In Europe, things have gotten so bad that it has been reported Merkel and Sarkozy are pushing mandatory balanced budgets for every country in the Eurozone. Also under consideration are joint “Eurobonds” to help fund sovereign deficits -- bonds which would be backed by every Eurozone country. This idea of balanced budgets is not unlike the ones that are floating around Congress (on which a vote is guaranteed due to the recent debt deal). Though every European country is different, the growing debt crisis across the pond should show American policy makers that it is better to avoid the storm than weather it.