At the Toronto summit of the Group of 20 leading economies in June 2010, high-income countries turned to fiscal austerity. The emerging sovereign debt crises in Greece, Ireland and Portugal were one of the reasons for this. Policy makers were terrified by the risk that their countries would turn into Greece. The G20 communiqué was specific: “Advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016.” Was this both necessary and wise? No.

The eurozone was at the centre of the sovereign debt crisis frightening the world. Rapid fiscal tightening was judged essential for troubled governments. That view, in turn, persuaded those not yet subject to market pressure to tighten pre-emptively. That was very much the position of the UK’s coalition government. The idea that being Greece was around the corner gained traction in the US, too, notably among Republicans. Today’s battle over sequestration is partly a product of that concern.

A leading and, in my view, persuasive proponent of a contrary view is the Belgian economist, Paul de Grauwe, now at the LSE. He has argued that eurozone countries’ debt crises resulted from European Central Bank policy failures. Because of its refusal to act as lender of last resort to governments, they suffered liquidity risk – borrowing costs rose because buyers of bonds lacked confidence they would be able to resell easily at all times. That, not insolvency, was the immediate peril.