Washington Post
September 26, 2011
“We are back in a danger zone,” says a top economist at the International Monetary Fund. Though an understatement, it captures the central paradox of this year’s annual meeting of the IMF and World Bank. Everyone is alarmed at the swift deterioration of the economic outlook, but there is no leadership — no consensus on what to do or, even when crude agreement exists, little conviction that practical politics will permit action. There is a hazardous vacuum of ideas and power.
Actually, what needs to be done is not obscure. Europe is now the flash point of global concern. Most of its major countries are heavily indebted. The economy has slowed to a crawl; the latest IMF forecast (perhaps optimistic) puts next year’s growth at about at 1 percent. Banks are threatened by their exposure to depreciating government bonds. What looms is a vicious circle: Slower growth makes it harder to cut budget deficits; this causes investors to dump European government bonds; interest rates rise; banks weaken; and the economy gets worse.
One way to break this cycle is to create a new global lending facility that would buy European debt and, in the process, lengthen maturities and charge modest (non-panic-driven) interest rates. This would provide time for Europe to make gradual changes — reducing spending, raising taxes — to bring budgets under control.
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