The euro area’s response to these issues has had some positive effects, but it remains a work in progress. Meanwhile, the United States is having a very difficult time finding a path that avoids an immediate major fiscal contraction but still puts the US fiscal accounts onto a sustainable medium-term trajectory.
As financial markets confronted all this, and also sought to digest a re-appraisal of near-term global growth prospects, we have seen during August a period of intense turmoil, particularly in equity markets. The net result of this period is that equity prices in most markets around the world are anything from 15 to 25 per cent below their recent highs.