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Europe is having problems again. This time, the problems have different roots than in 2010 and 2011. For the past two years, investors have feared a contagion of default, triggered by a loss of liquidity and a panic among bankers and other bond investors, something akin to what happened in the United States during the subprime crisis. The European Central Bank’s decision, late last year, to pour liquidity into markets has largely, if not completely, relieved such concerns. The more recent investor fears have attached themselves to the continent’s seemingly single-minded emphasis on fiscal austerity. Because such policies threaten to impose a vicious cycle on weaker nations, one in which budget restraint retards growth, creating still larger deficits that force still more restraint, investors have begun to wonder if these nations can ever reach solvency. The ECB cannot help in this regard. To answer these fears, Europe needs to develop a growth agenda to parallel its otherwise essential austerity measures.

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