. the adjustment will be that much more severe given the lack of an exchange rate policy lever. an early resolution to the crisis is unlikely because there is a lack of trust at a number of levels. there is a lack of trust in the leadership of the eurozone to take difficult decisions ; there is a lack of trust between countries ; there is a lack of trust of the banking system, and bis central bankers ’ speeches the recent revelations concerning libor fixing and money laundering reinforce that lack of trust ; and there is a lack of trust between banks, as evidenced in the dysfunctional nature of the interbank system in europe. and as austerity measures bite ever deeper, there are limits to how much the electorate can take. ultimately, the situation becomes increasingly economically and politically untenable. as the eurozone crisis impacts increasingly on the rest of the world, it again raises the question that was asked at the beginning of the crisis : can the emerging market economies decouple from the advanced economies? while there seems to be little doubt that the centre of gravity of the global economy is shifting eastwards, and the asian economies as a bloc may be better able to withstand a renewed global downturn given increased intraregional trade, a complete decoupling is unlikely. already a number of institutions have downgraded their emerging market growth forecasts and we have seen slowdowns in asia and latin america, including china, india and brazil. in 2010 brazil recorded an annual growth rate of 7, 5 per cent. in 2011 this had moderated to 2, 7 per cent, and in the first two quarters of this year, annualised growth rates of 0, 8 per cent were recorded. while chinese growth of 7, 6 per cent may seem extremely fast to us, we must bear in mind that it is significantly slower than the levels previously achieved, and further moderation is expected. a recent imf survey viewed the slowdown in china as having been initially self - induced, to correct overheating asset markets, but more recently is due to the effects of the global slowdown. the channels of contagion to emerging markets from the slowdown in the advanced economies are likely to be similar to those experienced in 2008. we have already seen declining emerging market exports and weaker commodity prices, although what happens in china will be an important determinant of the outlook for commodity prices. in general it will be difficult to sustain growth in many emerging markets, particularly those that are non

per cent to 108, 2 per cent ; that of greece from 107, 4 per cent to 165, 3 per cent and the italian ratio increased from 103, 1 per cent to 120, 1 per cent. these data illustrate three important points : first, that sovereign debt crises in some countries did not originate in the public sector ; that debt ratios can accelerate very quickly from seemingly benign and sustainable levels ; and that any given level of debt may be seen to be sustainable, but if the bond markets change their view on this, spreads rise to the extent that the costs of servicing these deficits can rapidly turn sustainable deficits into unsustainable ones. these debt ratios have increased because of widening current fiscal deficits in response to the crisis, and not necessarily because of previous excessively large deficits. for example, in 2007 ireland and spain had fiscal surpluses and the deficit / gdp ratio in portugal and italy were 3, 1 per cent and 1, 6 per cent respectively. greece on the other hand already had a deficit of 6, 5 per cent. bis central bankers ’ speeches at a time of continued private sector and bank deleveraging, excessively deep public sector austerity is likely to generate and reinforce negative growth and debt dynamics : as growth falls, the debt to gdp ratio increases, and if debt is reduced too fast, growth will fall even more. there is no doubt that some countries have excessive fiscal burdens and unsustainable fiscal positions. those countries have to adjust, and take the pain, but a key question is over what time horizon. nor does it mean that all countries should be following austerity measures. if they do, and the austerity measures proposed are excessive, it will only reinforce the global downturn. the pace of fiscal consolidation has to be more measured, and it is for governments and the central banks to ensure that their interventions keep the markets in check. as krugman and layard have argued, “ at a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilising force, attempting to sustain spending. at the very least, we should not be making things worse with big cuts in government spending or big increases in tax rates on ordinary people ”. this does not mean that governments should go on a spending spree. more focus should be placed on the efficiency of government expenditure, to ensure that it is of the type that is likely to generate growth,