Under French President Nicolas Sarkozy’s leadership, the G20 countries should develop a credible global growth and employment strategy that aims at an inclusive expansion that narrows the growing income gap within countries and between nations, fairly sharing the burden across boundaries.
Today, Europe is the urgent priority. The Brussels agreement on Greece’s sovereign debt and the more realistic “haircut” for bondholders, an increase in the firepower of the European Financial Stability Facility (known as the "rescue fund") to a potential 1 trillion euros, and bank recapitalization are necessary and significant steps.
But as markets have already realized, Europe’s fiscal, banking, and political crisis can only be resolved in a way that does not hamper growth prospects in the short term while putting into place credible long-term policies to reduce deficits. If everyone pursues austerity today, there is no way out for those with unhealthy balance sheets. Where deficits and interest rates are too high, governments have no choice but to cut budgets. Where balance sheets are healthy, for example in Germany, there is more room to support growth.
Greece and the rest of the European periphery can have no credible strategy to return to growth without supportive eurozone action of some kind. They cannot do it alone without the exchange rate or inflation as tools. As other central banks have realized, easing credit restraint is a necessary condition for growth. That is no less true for Europe.