What would a coordinated set of global economic policies look like? First, it would include credible plans in Europe and the U.S. to restore fiscal balance. In Europe that means agreeing on burden sharing for recapitalizing countries where deficits and debt have cut off market access or led to prohibitively high borrowing costs. Restructuring damages the euro, and fiscal consolidation in the distressed countries, while necessary, is probably not sufficient. That leaves Europe’s stronger countries, particularly Germany, with the residual liability. Greater fiscal centralization and political unification seem inevitable, but it may take time to muddle through to that outcome.
In the U.S., the main challenge is to restore fiscal balance without damaging the recovery and future growth. Getting the balance correct is complicated by the fact that the right fears the left will use fiscal stimulus as a path to permanently larger government, a path that the right (and apparently the general public) is unwilling to follow.