Showing posts from May, 2010

Lessons from the European Crisis

The latest forecasts put out by the IMF for global economic growth are cautiously encouraging. Following a 0.6 percent contraction in 2009 (more brutal in the United States, Europe and Japan, softened by rapid growth in Asia, particularly China and India) world output is expected to expand in 2010 by 4.2 percent and to continue at that pace in 2011. These forecasts assume that interest rates in the advanced economies will remain at near zero levels and that public debt levels will rise from 75 percent of GDP in 2008 to some 110 percent by 2014.

A huge increase in public indebtedness by the industrial countries is perhaps one of the most distinctive and worrisome features of the current global economic situation. The onset of the financial crisis was met by calls from leading economists such as Paul Krugman and Larry Summers to respond to the contraction of demand with fiscal stimulus. It was essential to avoid repeating the mistakes of the Great Depression when the authorities in a mis…