The Group of 20 communiqué calls for “fiscal measures to stimulate domestic demand to rapid effect” and underlines the needs to maintain “a policy framework conducive to fiscal sustainability”. The European Union should heed the G20’s advice. Without a budgetary stimulus the recession will lead to a second round of credit stress. However, structural deficits in many EU member states were high even in good times, so fiscal sustainability is also a concern.

But can Europe deliver? The obstacles are daunting. The fiscal room for manoeuvre varies greatly among the member states. The political weights attached to a fiscal stimulus and to fiscal sustainability clearly differ among the core countries, France and Germany in particular. The high degree of economic integration implies strong incentives to free-ride. Reaching a differentiated agreement on who does what could take months if not years, while the urgency is to act now. We therefore propose a three-part European recovery programme.