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Why Mexico should fear the US ‘fiscal cliff’

December 28, 2012

As the United States veers ever closer to the dreaded “fiscal cliff,” should Mexicans also be bracing themselves for an economic fall?

If President Barack Obama and the Democrats fail to reach an agreement with the Republican Party ahead of the looming December 31 deadline then a combination of increased taxes and government spending cuts is expected to push the U.S. economy into immediate recession. The effects of this would be felt worldwide, with Mexico at particular risk.

The problem for Mexico is that if the United States falls into a recession then spending will drop dramatically. Of Mexico’s exports, 76 percent go to the United States, so reduced demand there could also wreak havoc on Mexico’s buoyant economy.

Furthermore, a deepening of the global financial crisis could affect the exchange rate between the Mexican peso and the U.S. dollar or the euro, leaving Mexico at risk of the kind of inflation which has proved so devastating in the past.

The biggest gift the United States could bestow Mexico and the world this New Year is for its ideologically opposed parties to come to a compromise to prevent this potential crisis.

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