In the euro area, the sovereign debt crisis of three countries – which together account for 6 per cent of the area’s GDP – can potentially have significant systemic effects. Public finances must be brought under control. A prolonged expansionary policy undermines the sustainability of the debt and damages economic growth. In Europe a start has been made on adjustment.
This could not be postponed, despite the weakness of the recovery. The emerging economies’ prompt return to growth, adverse climatic events and socio-political upheaval in the Mediterranean and Middle East have pushed up the prices of energy sources and food, by more than 30 per cent in the last six months. The risk of inflation is rising.