The US and European Union together make up about half of the global economy, and recovery is quite uncertain in both of these big economies. Contrary to a lot of folk wisdom and political posturing, the problem is not irresponsible government spending in either case, but a lack of commitment by the authorities in both areas to ensure a robust economic recovery from the world's deepest recession since the Great Depression. This is true in many other countries as well.
The continued weakness of the US economy was hammered home last week with the monthly employment report for May. The creation of only 20,000 non-Census jobs in May, down from 217,000 the previous month, sent shock waves through the financial markets.
The Eurozone's problems are seen as driven by a financial crisis, and this is partly true, in the sense that financial markets have adopted a sceptical attitude toward the sovereign debt of Greece, Spain, and some of the other weaker European economies.
But the Eurozone's financial problems can also be resolved with a robust economic recovery. Spain's economic problems, like those of the United States, were caused by the collapse of a huge real estate bubble. Its public debt, currently at a relatively low 60% of GDP, will be quite manageable when its economy is growing at a reasonable pace. In fact, it could be quite manageable right now, if only the European authorities would agree to finance its borrowing costs at a low (or even zero) interest rate until the economy is growing again. Spain has about $68bn to borrow for the rest of the year; the cost to the Eurozone authorities of financing this at zero interest rates would be minimal.
In fact, both Europe and the United States have very low inflation at present - less than 2% in the US and about 1% in the Eurozone. This enables both the Fed and the ECB to engage in money creation without fear of inflationary impact. The US Federal Reserve has doubled its balance sheet during this recession, creating more than $1tn of base money in the last two years without any appreciable effect on inflation. As my colleague Dean Baker has pointed out, in these circumstances the Fed can buy US Treasury bonds to finance deficit spending, thereby eliminating the burden of such debt. Japan has done quite a bit of this kind of financing over the years. The country's gross public debt is over 220% of GDP (nearly twice that of Greece) but nobody is talking about a "sovereign debt crisis" in Japan, and the government can currently borrow at 1.24% for its 10-year bonds. The Japanese government currently pays less than 2% of GDP in net interest on its public debt - a low debt burden.
All this is not to ignore the structural problems in both of these mega-economies, or the world economy as a whole. As many economists have noted since the adoption of the euro, there are serious problems with a common currency across countries with large differences in productivity and no common fiscal policy. The structural problems in the US economy are also serious: the dollar has been overvalued for many years, causing chronic trade deficits and a reliance on bubble-driven consumption (first stocks, then real estate) to maintain economic growth. As a result, most baby boomers have next-to-nothing in net savings for their retirement, and the economy's savings rate has been much too low in general.
But these problems will have to be resolved in the context of a growing economy, not one with mass unemployment, deficit demagoguery, and all the associated dysfunctional politics. This is also true of the environmental transition that needs to take place if we are to avoid climate catastrophe.
That is why it is such a pity that the richest governments and central banks in the world have only a half-hearted, vacillating commitment to economic recovery - and are actively inhibiting it in the case of the weaker Eurozone economies. (They are also actively slowing recovery in the developing world: a Unicef report in April (pdf) looked at 86 IMF country reports and found that nearly 40% of the governments are planning to cut spending in 2010-2011, as compared to 2008-2009; some of these cuts are being encouraged by the IMF.)
At the highest levels there are undoubtedly economists who understand the basic national income accounting of what is going on - hence President Obama's top economic adviser Larry Summers' recent support for a $200bn "mini-stimulus". But the power of the financial sector, which cares little about economic growth and often sees it as a threat to its wealth, is strong. It is no coincidence that China, where the government controls the financial sector instead of the other way around - is the only one of the world's largest economies that ploughed right through the world recession with 8.7% growth last year. Deficit hawks and other economically challenged ideologues with disproportionate access to major media also make it politically difficult for many governments to do what is right for their constituents.
But there are practical policies in the world's largest economies that can restore growth and employment, and they are hardly radical. They would just take a bit of political courage that is lacking at the highest levels.
