Reply #12: Dangers loom beyond the eurozone

[Demeter]

The crisis in Greece serves as a warning to other countries not to lose control of their fiscal positions and the confidence of markets. But advanced countries have now stretched their public budgets so far that investors, economists and international organisations are getting worried.

Returning to form, the International Monetary Fund warned this month that reducing budget deficits, “should precede the normalisation of monetary policy” in many economies and that they “need to make more progress in developing and communicating credible medium term fiscal adjustment strategies”.

Willem Buiter, chief economist of Citi, uses rather blunter language. “Today’s ‘best of breed’ may be the same dog that yesterday was fit only for the World’s Ugliest Dog Contest – an indicator of just how far the fiscal conditions in most advanced industrial countries have deteriorated,” he says.

The problem is simple. Huge budget deficits resulting from the financial crisis have put public debt on an unsustainable trajectory and doubts are growing that the political will exists for the nasty medicine to be swallowed...

Read more >>
http://link.ft.com/r/WDI4RR/D4IM0O/JQU4J/A7ESN9/C5XYOB/4O/t