America avoids the Fiscal Cliff, as Britain and Europe tumble over it.

America didn't go over the fiscal cliff. That's good news, right? Well, the stock market seemed to think so: the FTSE rose over 6,000 for the first time in eighteen months. And it was surely a good thing to see investors here, and in the rest of the world, celebrating an increase in taxes for the rich - or at any rate those earning over $450,000 a year.

This was a victory for President Obama, of that there is no doubt. Refusing to blink as the Tea Party Republicans took America to the brink, he managed to avoid any big cuts - at least for now - in federal spending on tax credits to the low paid or welfare to the long-term unemployed, who stood to have their benefits cut completely. The US is a slightly fairer country as a result. The Republicans have been left divided and confused, with the budgetary super-hawk, Paul Ryan, voting with Obama.

But isn't it just a little odd that hedge fund managers and other stock market money men here should find this all so positive? Presumably, they believe that these measures, the avoidance of deep spending cuts, mean that the world economy is now in better shape. But that isn't the economic logic they have been applying on this side of the pond. In the UK, the Coalition decided to go over its own voluntary fiscal cliff in 2010 when the Chancellor, George Osborne, announced that he was going to put through the deepest spending cuts in half a century and eliminate the deficit in five years. 'Cheers!', said the stockmarket suits. 'Just we need to put the country on course for recovery'. Unfortunately, the UK economy went into a triple dip recession which looks like lasting well into 2013. So, why is a fiscal cliff good here but not in America?

In Europe, they went even further over the cliff and plunged Mediterranean countries like Spain, Greece and Portugal into crushing economic depressions. Why? The US is in just as serious a debt hole as the eurozone. America has a £16.4 trillion debt, and its annual deficit – the amount the governmen has to borrow each year – is nearly 9% of GDP. That's higher than ANY eurozone country's deficit and 3 times the 3% ceiling in the EU “stability pact”. Yet, the ECB and the German bankers were yesterday also celebrating the fact that America had decided not to do what they've been doing. Perhaps they could learn something.

Only thing that really matters in 2013: is eurozone crisis over?

 On the morning of May 7^th 2012, Greek voters woke up to discover that they had effectively voted to leave the EU. A majority of the new  members of parliament were in parties that rejected the crippling terms of the latest EU £110bn bailout package. It looked like the beginning of the end for the 11 year old European single currency. The cracks in the European Union began to look unbridgeable

Bond investors across the world reached for their phones. Many financiers decided that the euro was finished, and they placed their massive bets accordingly. It was reported that Lord Rothshild of the banking dynasty, had personally taken out a £130m“short” position against the battered single currency. Surely, the EU could not recover from this! If Greece fell, then so would Ireland, Spain, Portugal and Italy which were all in the same deflationary boat – saddled with over-valued currencies, forced to cut spending in a recession, crippled by unsustainable interest rates on their massive debts. A new word was coined to describe the countries on their way out: “Grexit”

Europe's political leaders seemed caught in the headlights; unable to reconcile the need for fiscal discipline with the imperative of restoring economic growth. In Greece, where the economy had shrunk by 20%, violent social unrest had become an almost weekly occurrence as EU-imposed cuts made the recession even deeper. In Spain, unemployment among under 24 year olds rose to over 50%.. And the contagion began to infect the entire eurozone as France lost its triple A credit rating and Germany, the most powerful economy in the EU, plunged toward recession.

In Britain, the political classes awaited the inevitable. Most of the British media had decided long since that the euro was a dead duck and that it was only a matter of time before it collapsed. You cannot have a single currency without a central government and a central treasury, with the power to intervene in national budgets and the power to issue bonds for every member state. Surely, Greece and Spain would see sense and leave the euro, devalue their currencies, default on their debts like Argentina in 2001, and seek to recover on the basis of low wages and cheaper exports. What alternative did they have? Sticking with austerity was leading to economic depression and social unrest.

But somehow, the inevitable didn't happen. The Greek political parties couldn't agree on a government and decided to hold another election on 17^th June. This left the pro-austerity New Democracy, led by conservative Antonis Samaras,  with a reasonably firm mandate to stick with the euro, bailout and all. Greece would not default. Then, Mario Draghi, the head of the European Central Bank, announced that he would do “whatever it takes” to stop the single currency collapsing. Many believed this was just another empty promise from a bankrupt eurocrat, but Draghi proved true to his word. In September the ECB committed itself to unlimited purchasing of european government bonds, and the sovereign debt crisis began almost immediately to subside. The rate of interest on Greek, Spanish and Italian debt returned to pre-crisis levels.

Spanish debt crisis is a crisis for all of us.

     Capital Flight may sound like the name of a new budget airline – in fact it's what happens when a country loses trust in itself. In the first three months of the year, Spaniards exported a total of e100 billion to London, Frankfurt, Paris - anywhere. The biggest flight of funds since records began. Citizens, firms and banks are hedging against the likelihood that Spain will depart the eurozone, crushed by the burden of its sovereign debts. The respected former Spanish premier Felipe Gonzales said last week that “Spain is in a situation of total emergency, the worst crisis we have ever lived through”.

Where did this come from? It was supposed to be Greece that was on the point of departure. Only last week we were all worrying about contagion from a “Grexit” spreading to other Mediterrannean countries. But the contagion seems to be happening before the disease. In fact, there's a possibility the patient may die even before it is infected, because the collapse of Spain – an economy four times the size of Greece – would be curtains for Europe, and probably for the world economy. It's not just too big to fail; it's too big to bail.

What is happening to Spain is similar to what happened to Lehman Brothers in autumn 2008, except on an epic scale. That was just a run on a Wall Street investment bank; this is a run on a trillion euro economy, the fourth largest in Europe. When entire countries go bust the reverberations are felt across the planet.. If Spain restores the peseta – and this is actually being talked about – then it would default on the huge debts owed by its private sector to international banks. They would go bust as a result, causing credit to cease overnight and international trade grind to a halt. There would be runs on nearly all European banks, not just the Spanish ones. Cash machines would close. It's as serious as that.