Yesterday the IMF chided the United States and the United Kingdom for their recent pursuit of austerity. The organization released its latest World Economic Outlook in anticipation of the annual World Bank-IMF spring meetings in Washington, when global financial dignitaries gather.

The IMF put forth top officials to discuss the organization's forecast -- which I'll take up in another post -- and also to critique the state of fiscal affairs in major countries. Carlo Cottarelli, the director of the IMF's fiscal affairs division, described 10 economies with serious fiscal problems -- debt in excess of 90 percent of GDP and rising. These 10 -- the United States, Japan, the UK, France, Italy, Spain, Belgium, Greece, Ireland, and Portugal -- account for 40 percent of world GDP (for all the headlines they draw, Greece, Ireland, and Portugal account for very little of that global GDP).

Cottarelli warned that there were numerous studies indicating that when debt hit 80 to 90 percent of GDP, growth would suffer. This seemed an oblique reference to the bubbling controversy over the work of Ken Rogoff and Carmen Reinhart. Count the IMF in the camp that think Rogoff and Reinhart are basically right. Cottarelli's conclusion, given his reading of the broader evidence, was that a country should not seek to stabilize debt/GDP at the 90 percent level, but rather should aim for significantly lower levels of debt.

While that might seem to support a call for austerity, the IMF's short-term policy conclusions were just the opposite. As the Wall Street Journal reported it:

"...the International Monetary Fund on Tuesday called on countries that can afford it -- including the U.S. and Britain -- to slow the pace of their austerity measures ... it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn. ‘Fiscal adjustment needs to proceed gradually, building on measures that limit damage to demand in the short term,' the IMF said."

There were two interesting caveats to this call, however:

1. This recommendation to back off austerity only applied to countries that are not currently subject to market pressures.

2. Short-term easing needs to be paired with credible medium-term restraint. (Borrow more today; pay it back tomorrow). 

Those caveats are critical and raise all sorts of questions. Fortunately, I was at Cottarelli's press conference and got to ask.

Take the "market pressures" exception. You know a country is experiencing "market pressures" when that country's bondholders are panicking, a debt sell-off is underway, and interest rates on sovereign debt are soaring. When no one wants to buy or hold your debt, it is an awkward time to try issuing more. On this, there is broad agreement.

But how do you know when investors are about to lose faith in your debt? Is there any reason to expect advance warning? When should preparations begin?

Cottarelli's response was that we do not really know in advance. We have to guess. There are some indications of vulnerabilities -- a country whose debt is held more by international investors is more vulnerable -- but it's an art, not a science.

An honest but unsatisfactory reply. It does little good to say that we know market pressures when we see them. Once the market has turned on your debt, it's too late. Budget processes are slow, with long lags from initial discussion to actual spending. If interest rates were to spike on U.S. debt in September 2014, borrowing for that time period is covered by the budgets currently under discussion in Congress. And, for the record, Federal Reserve data show that in 2011 roughly 46 percent of U.S. debt was held by international investors. 

On the question of repaying additional short-term borrowing with medium-term frugality, I asked about judging the credibility of fiscal plans. The U.S. fiscal stimulus of 2009 was supposed to be a temporary measure, but worked itself into spending baselines. Congress regularly adopts measures that ‘balance' 10-year budgets, only to repeal those measures when the time comes. A classic example is the attempt to cut payments to Medicare providers, requiring a regular "doc fix" when it turns out there is a limit to the pro bono services doctors will provide.  So how do we know that medium-term promises are credible?

Cottarelli suggested that a first step was to look at whether a plan contained sufficient detail. Beyond that, though, he acknowledged it was a much more difficult issue. His recommendation was to look at a country's past record of implementing fiscal adjustment.

Other than the recent austerity, to which they object, it was unclear which episodes in recent British or U.S. fiscal history offer reassurance on this count.

The rationale for the IMF's call to set aside austerity is pretty clear -- large parts of the world are slumping, central banks are doing all they can on the monetary side, so the IMF would like to see a boost to demand through looser fiscal policy (lower taxes or higher spending). The Reinhart-Rogoff controversy is a sideshow here. The IMF is not embracing ever-rising debt levels; it is pushing select countries to adopt a temporary slump-busting burst.

Yet if one runs through the IMF's own check-list of pre-requisites for short-term relaxation -- current debt at sustainable levels; freedom from worry about a market panic; credible medium-run plans for cuts -- none of them seem to apply. The IMF prescription appears less a careful calculation than a double gamble. It is a bet that further short-term measures are appropriate to address a slow-down that has now dragged on for five years, and also a bet that those who adopt the prescription will not have to pay a hefty price down the line.

I wrote here a while back when Mexican President Enrique Peña Nieto was elected that we should give him a chance. I said this for several reasons, among them: 1) he and a majority of his party are of a new generation that has turned its back on the old patron-client system that characterizes so much of the developing world, and 2) he knows that to lift the half of the population that still lives in poverty and suffers from massive economic inequality he must increase economic growth, which is possible only if monopolies are smashed and foreign investment welcomed. He's off to a good start, bringing his party with him and building coalitions with the center-right PAN and others.

Three of his administration's actions demonstrate my optimism.

First, like the last PRI president before him, Carlos Salinas, Peña Nieto has shown his resolve and ability to put reform and the public above his cronies by having the head of the national teachers' union arrested on corruption charges (see here and here). No matter that she helped him get elected -- she opposed his reform to strengthen the hand of the state to hire and fire teachers at the expense of the union's overweening power. It is easy to be cynical and say that she was arrested for being a political opponent. Maybe that is exactly what happened. But maybe the president doesn't care who was or was not a supporter of his campaign for the presidency -- corruption is in his sights. In the end, if she is truly corrupt and found guilty, Mexico is better for it no matter what motivated the arrest. With his act he wins respect and not a little fear from the caciques of other sectors who might oppose his reforms and try to take Mexico backwards. We should remember that Mexico is not yet Switzerland or Sweden and is still an evolving democracy. Think Chicago, or Louisiana before Gov. Bobby Jindal.

Second, he is taking on the richest man in the world -- Carlos Slim, who has for decades controlled telecoms in Mexico. Slim controls 80 percent of the country's fixed lines and 70 percent of its mobile phones. The reform the president has put forward (see here and here) would give the government the right to break up monopolies that constitute 50 percent of a market and to make it easier for foreigners to invest.

And finally, the really big prize: reform of the nationalized oil sector. This is the third rail of Mexican politics after Salinas in the late 1980s reformed the communal land system. Peña Nieto leads a party that for decades led with the cry "the oil is ours!" as it nationalized and ran the industry. While the state hasn't run the industry into the ground as Chavez did, it has never lived up to its potential as a key funder of the government and for the last eight years has seen its production capacity drop. The problems stem largely from keeping significant foreign investment and technology out of the industry. The president means to change all that and got a good start at it by getting his party to vote in favor of the reform that now moves to Congress.

While it is unlikely that the leftist parties will support Peña Nieto's reforms -- and certainly not the oil industry reform -- the center-right PAN should and supporters of Mexico, free trade and the free market definitely should. U.S. policy should be to congratulate Peña Nieto and his party and to encourage Mexico to open itself further by these reforms. These are hopeful days for Mexico. 

The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.

So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?

As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.

Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.

The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.

It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?

Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.

The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.

Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:

"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."

This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.

The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:

"...in the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."        

We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.

And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.

The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.

By Ambassador Roger F. Noriega and José R. Cárdenas

Last week, ahead of President Obama's meeting with the Business Roundtable, the Roundtable and the U.S. Council for International Business released a report saying that, "the success of American companies, and of the U.S. workers they employ, increasingly hinges on their success as globally engaged companies."

Indeed, there is some optimism in Washington that President Obama, free from political constraints in his second term (i.e., Big Labor opposition to free trade), can implement a robust international trade agenda as a sure-fire way to create new jobs at home, markets for U.S. goods and services, and investment opportunities abroad.  Much of that talk is focused on action regarding the Trans-Pacific Partnership and a trans-Atlantic free-trade agreement with Europe.

We have just co-authored a paper for the American Enterprise Institute -- "An action plan for US policy in the Americas" -- the essence of which can be distilled down to the following: Mr. President, stop ignoring Latin America!

If the President's objective is to use trade to help jump-start the U.S. economy and create more jobs here at home, then Latin America has to be part of the equation.  That's because when you look beyond the rogue behavior of Venezuela's Hugo Chávez and his populist ilk, clearly the Western Hemisphere is home to some of the most dynamic markets in the world.

Since 2003, an estimated 73 million Latin Americans have risen out of poverty. Moreover, between then and 2010, the average Latin American income increased by more than 30 percent, meaning that today nearly one-third of the region's nearly 570 million population is considered middle class. And in just the next five years, regional economies are projected to expand by one-third.

Given the Americas' close historical, cultural, familial, and geographic ties, linked by common values and mutual interests, what that means for U.S. businesses is millions of new consumers with an ingrained affinity for U.S. goods and services. 

Greater economic integration will also create momentum to deal with other challenges in the region, from security issues to modernizing immigration policy -- not to mention rendering obsolete once and for all the retrograde populist agendas of some who prefer looking to the past rather than the future.

It's time that U.S. policymakers dispensed once and for all with Old Think when it comes to Latin America: that is, what is it the U.S. can do for the region.  Today, it is what we can do together to benefit all the peoples of the hemisphere and boost our own recovery and competitiveness. If President Obama is to pursue an aggressive trade agenda in his second term, the incentives are powerful for a fundamental reassessment of relations right here in our own hemisphere.

A relentlessly-optimistic Dan Drezner has thrown down the gauntlet! (Well, more like a dinner napkin, really, but same idea). He defends the prospects for trade progress in President Obama's second term and descends from generalized good cheer into specifics. With a meal on the line, he writes:

"I'm willing to bet that at least two out of the following four things will happen during Obama's second term: 

1)  A Trans-Pacific Partnership that is ratified by Congress;

2)  Bilateral investment treaties with India and China;

3) A transatlantic integration agreement;

4)  A new services deal within the auspices of the WTO."

I accept.

Now, for those of you wagering at home -- not that Foreign Policy condones such behavior -- the question is not just which of us has the clearer crystal ball; you also want to think about the point spread. Over at Cato, Simon Lester offers some initial guidance to eager bookies:

"I would rate the chances of seeing completed China/India investment treaties or a U.S.-EU FTA at close to zero; a ratified TPP at around 10 percent; and a WTO services agreement at around 25 percent."

While I like the implication -- a 97.5 percent chance that I feast at Drezner's expense -- I would differ a bit on the odds.

The challenge of handicapping these events is that they are not precisely defined. A "transatlantic integration agreement" could run anywhere from an accord that promises modest services integration and regulatory cooperation to a full-fledged free trade agreement between the United States and the European Union. A bilateral investment treaty could range from a new consultation mechanism to adoption of the complete U.S. model BIT.

Thus, a central question: How readily can the Obama administration push through a minimalist version of any of these trade measures? There is a clear incentive to do so. Agreements ought to be easier if you can drop the hard parts. Signed and passed agreements constitute a legacy. Only quibbling trade geeks will ever weight the virtue of those agreements by the extent of their coverage. This is one reason for the long history of bilateral or plurilateral trade agreements around the globe that delivered very modest amounts of liberalization: they all delivered a signing ceremony for leaders.

Yet there are some significant obstacles to "going lite." Here are four:

1. Commercial significance. It would be dramatically easier to negotiate the TPP if issues such as intellectual property or state-owned enterprises were omitted. Those issues are divisive both within the United States and between participating countries. Yet they are on the agenda because key industries care about them and see opportunity in regulating the behavior of trading partners. While the Obama trade legacy will not be significance-weighted, there needs to be a minimum level of business enthusiasm to get an agreement through.

2. Balance. Any agreement has to offer something for each party. The narrower the agreement, the less likely all the participants come away with something they like. This is a problem with a services-only deal within the WTO: Usually developed countries are demandeurs for services market access while developing countries are demandees. Of course, the developed countries could go off on their own and sign a plurilateral services agreement among themselves (still under WTO auspices), but that poses some problems. It does not win domestic services firms the market access they crave, it ticks off the developing countries who have been circumvented, and it may limit negotiating space for any future, broader WTO agreement that might draw the developing countries in.

3. Leverage. In the early days of post-war trade talks, agreements came along every couple years. If your industry's concerns were not taken up in one round, you could be reasonably confident you could push for them in the next. In the last forty years, though, there have been only two completed global trade agreements (the Tokyo and Uruguay Rounds). FTAs have been concluded more frequently, but generally only one per country pair. Now suppose you're a U.S. agricultural producer with longstanding concerns about European agricultural practices. How do you react to the prospects of a limited U.S.-EU trade deal that leaves out agriculture? You hate it. You probably think that this is your moment of maximum leverage to reform EU policies; a limited agreement gives that leverage away. The argument would be similar for a modest BIT with India or China; anyone with investment concerns might see a limited agreement as worse than no agreement at all, since the chances of revisiting the topic would be small.

4. Precedents/Congress. The United States has been relatively formulaic in its approach to trade agreements, moving from the NAFTA model, to "NAFTA+" to "Chile+" - the same basic structure, with a few improvements. No major deviations from the same 'high standards' model of a trade agreement. That was one of the attractions of the TPP -- it was a group of countries who had committed to a fuller, deeper version of trade liberalization, matching the U.S. standard of depth and breadth. A standardized approach solves two particular challenges for U.S. trade policy. First, the country undertakes multiples negotiations, spread over time. Second, any administration must reach an understanding with Congress, which has constitutional authority over trade. A fixed template makes it harder for successive trading partners to try to exempt sensitive sectors. It also means that carefully negotiated understandings with Congress need not be reworked with every agreement. While an FTA- or BIT-lite may ease external negotiations, it can complicate discussions with Congress and with future trading partners.

So a 'lite' approach may be hard to swallow.

There is certainly more to chew on as we think over trade prospects for the next term. I have yet to cook up a full alternative set of odds. But am I confident in my skepticism? You bet.

From an economic perspective, should we be optimistic or pessimistic in the wake of the election? The redoubtable Wolfgang Munchau offered an appealing and different way to think about this in the Financial Times over the last couple weeks. In the context of the euro crisis, he asked not what a crystal ball foretells for the future of the euro crisis, but rather what you have to believe in order to be optimistic about that future. How heavily tinted do your rose-colored glasses have to be for things to look good?

So, what does one have to believe to be optimistic about the U.S. economic situation? There certainly are such optimists. A fundamental premise of the Obama campaign was that the president had adopted all the right economic palliatives, but that they just took time to kick in.

There are at least a couple broad economic arguments one could make in support of a cheery view. Carmen Reinhart and Ken Rogoff cannot usually be accused of excessive cheerfulness in their forecasts. They have been vehemently arguing that downturns that stem from financial crises take a long time to sort out. This is a prompt to lower our expectations. We need not be disheartened by weak economic performance, the message goes. These things just take a long time; they get better eventually. This suggests restored confidence in tools (such as the stimulus) that might otherwise seem to have been ineffective. It would seem to promises payoffs to the patient and perseverant. That was an Obama campaign theme: Give it more time.

This plug for patience is consistent with the second principal positive premise: It's all cyclical. Economists have long discussed the booms and busts of business cycles. Such discussions had faded during decades of relative prosperity (sometimes referred to as "the great moderation"). Moderation is now out the window, so we can turn back to some familiar cyclical arguments. Why should things turn around? Cars and dishwashers and machine tools wear out. People can put off replacement purchases for a while, but eventually they need something new. Along the same lines, young people who may have stayed in their parents' house a while longer than otherwise finally go out, get married, get a place, and furnish it. The price of the house they had looked at may finally seem to have bottomed out. These are all cyclical arguments for a turnaround. Enthusiasts of such explanations point to blips in consumer confidence like buds signaling the start of spring.

If one buys this reasoning, President Obama will now get to reap the benefits of his work and take credit for the inevitable recovery to follow. Had Gov. Romney won, the reasoning goes, he would have unjustly taken credit for the good times to come. Perhaps.

What does one see with untinted glasses? U.S. economic growth has to come from somewhere. It is hard to argue that it will emerge from a bold revival of consumer spending. Pessimism on this point is part of what is behind discussions of a "new normal" that features slower growth. Consumers are still working their way out of debt, the country is still borrowing, and the future liabilities toward an aging population loom large. This is a difficult time for a spending binge. The impending fiscal cliff is one sign of this, though much bigger pension and entitlement challenges remain unaddressed. If you tax people now, they have less money to spend. If they worry about future taxes, they may well save to meet those coming obligations. That would be in lieu of spending.

If the growth is not to come from selling to U.S. consumers, what about selling abroad? The Obama administration did this math quite a while back. The president set a goal of doubling exports in 5 years. Laudable, but how to achieve it? The administrations proposals largely centered around small export promotion initiatives and initial success was claimed when exports rebounded from their recession lows. When the administration finally moved to pass the free trade agreements with Korea, Colombia, and Panama, it claimed those, too, as part of its plan to double exports. Serious new market-opening could help spur markets, but the only such initiative that President Obama has pushed forward -- an expanded version of President Bush's Trans-Pacific Partnership -- faces major obstacles.

In terms of growth through exports, all of these policy measures pale in comparison to the economic health of trading partners. For the United States, NAFTA looms largest, taking almost 1/3 of U.S. exports in 2011. Any economic booms to be found there? The latest IMF World Economic Outlook predicted that Canadian growth would slow from 2.4 percent in 2011 to under 2 percent in 2012 and 2013. Mexican growth, while faster, was 5.6 percent in 2010, 3.9 percent in 2011, and is supposed to keep decelerating through 2017. So where else might we see growth? The European Union takes 18 percent of U.S. exports, but it has its own well-publicized troubles. The latest figures show that Germany may be approaching a recession. China buys about 7 percent of U.S. exports, but its growth has also slowed. Add in a troubled Japan and we've now described just over 60 percent of U.S. export markets.

In all likelihood, the actual picture is worse than just described. These tepid growth prospects assume nothing drastic will happen to throw off the world economy. One of the striking things about this last election season was that there were any number of foreign policy and economic crises that could have exploded. Syria came closest, but Iran, U.S. fiscal troubles, and the euro crisis all remained relatively quiescent. That may be considered good fortune, or it could be the result of hard policy work sweeping problems under the rug. It was no accident that the fiscal cliff arrived after the election. Treasury Secretary Geithner was pretty blatant about asking European countries to move smoothly past deadlines that might have ignited an economic conflagration. I do not have the expertise to speculate about why Israel was so well-behaved over election season, despite its deep-seated concerns about Iran. The upshot was that there was no Middle East conflagration disrupting oil supplies.

These all appear to be problems deferred, not problems solved. Such deferrals often lead to more explosive outcomes later on. To foresee that these potential problems will all remain tranquil for the four years to come would require one to look through a particularly garish set of lenses.

Ah, the emotional roller-coaster ride that is modern central banking; the way our collective hopes and mutual funds soar and plunge with the advent of each new acronym from Europe - EFSF, SMP, and LTRO. Yesterday, a new bout of global financial euphoria erupted with the ECB announcement of OMT. The Financial Times lead headline proclaims: "ECB signals resolve to save euro."

To set the scene, the troubled nations along the periphery of the eurozone have recently been plagued by high and rising interest rates when they try to borrow. For countries that have racked up a substantial amount of debt, high interest rates translate pretty quickly into spending obligations they cannot meet. Greece, Ireland, and Portugal all had problems of this sort, but were small enough to be bailed out by their eurozone brethren. Spain and Italy are too big for that, so when their interest rates began to climb, it looked like a mortal threat to the euro project.  

Traditionally, when a sovereign nation has bills it cannot pay, it can resort to printing money. The central bank will buy up the sovereign's unloved bonds, thus injecting newly-printed money into the economy, driving up the price of the bonds, and, in turn, driving down interest rates. But Spain and Italy cannot do that. A key facet of having a common currency is that only the European Central Bank (ECB) has this power. Yesterday, the ECB came up with yet another plan to do so.

Why so many plans? Why not just print money until the pain goes away? There's a downside to the printing. When countries satisfy insatiable spending desires by printing money, ever-increasing piles of currency chase after a limited number of goods and inflation ensues. There are cautionary tales seared into national memories, like the scenes from Weimar Germany in which people carried wheelbarrows full of cash to make their daily purchases.

With such memories in mind, Germany demanded some conditions when it gave up its Deutsche Mark for the euro: No bailouts and no central bank financing of sovereign borrowing. The ECB would have a mandate even simpler than that of the Fed in the United States -- it would just seek to avoid inflation. These strictures have proven an obstacle for the modern ECB, as it has sought to engage in bailouts and central bank financing of sovereign borrowing.

So how did the ECB end up choosing between its founding principles and the salvation of the euro project? For much of the last decade, lenders perceived sovereign bonds around the eurozone as equally safe, more or less. Spain could borrow at rates close to those that Germany faced, all of which were low. Then, in the wake of the financial crisis, these "spreads" -- the difference in borrowing rates -- began to grow. Germany still paid very little, but Greece, Spain, Italy and others began to pay a lot. There are a couple different explanations for why, and which one you pick should largely determine whether you think yesterday's ECB action will work.

Explanation #1: While Greece had real trouble, markets panicked and fled from otherwise viable economies. This looked like a classic bank run, in which a  healthy institution could be run into the ground under a public stampede. Just as in a bank run, if a lender of last resort steps in and reassures the twitchy masses that everything is fine, that reassurance will be self-fulfilling. In the case of Spain and Italy, the argument would go, if people were not so worried about the countries' ability to finance their debts, they would charge lower interest rates and the countries would have no trouble financing their debts. In this scenario, the ECB's move yesterday was its boldest attempt yet to quell the panic.

Explanation #2: When Greece got into trouble, it roused investors from their slumber. Whereas they had previously just assumed that all euro zone sovereigns were equally risky, they now pored through the books more closely. They did not like what they saw. Countries were on unsustainable fiscal paths. The ratio of debt to GDP was high and climbing. There were attempts at government reform, but they were politically painful and looked in any case to be too little, too late. Better to get out while one could. Sell.

While the ECB is largely betting on the first explanation, it is worried about the second. Under its new plan for Outright Monetary Transactions (OMT), it will buy up the debt of troubled countries. It significantly relaxed two limitations it had earlier put on such measures: it is not demanding that it get repaid before everyone else (a clause that had scared away private investors) and it is lowering standards for the kind of collateral it will accept. At the same time, countries must formally ask for help and sign up to a reform program. Further, the ECB will only buy short-term debt.

A number of problems loom:

• Political dissent. The German representative to the ECB, Jens Weidmann, appears to have voted against the plan and said it was "tantamount to financing governments by printingbanknotes." German Chancellor Angela Merkel backed the ECB move, but has been criticized for doing so.

• Any takers? Past eurozone programs, such as the SMP, have not been fully utilized. In the case of OMT, the big question is whether Spain or Italy would be willing to seek a formal assistance program -- a politically perilous humiliation.

• Will it work? Sovereign debt is ony part of Europe's economic crisis. Short term rates are already low, but they are not being passed on to private borrowers in the afflicted countries. It is unclear how the OMT will change that.

• Moral hazard. It is difficult to see how the ECB would extricate itself from one of these programs, should a country fail to undertake successful reforms. In theory, of course, it could just stop. But if the ECB cannot tolerate the thought of a Spanish failure now, how much worse will it look down the road when the ECB's balance sheet is stuffed with Spanish or Italian bonds and it has waived any rights to be paid before other investors?

If recent experience is a guide, there will be a period of elation on the belief that the ECB has solved the euro zone problem. Then people will begin to read the fine print and the roller coaster will begin its next descent.

More than any other economic danger looming on America's immediate horizon, including a possible break-up of the eurozone, sequestration poses the greatest single threat to American recovery in the near term. This arcane process came into force when the congressionally-mandated "super-committee, "officially known as  the Joint Committee on Deficit Reduction, failed in its mission. As a result, the sequester calls for reductions in government spending totaling $1.2 trillion over the next nine years, of which $984 billion, or $109 billion annually, will be realized from across-the-board budget reductions.

Although defense accounts for only 14 percent of the budget deficit, when entitlements are taken into account, the annual $109 billion dollar cut will be evenly divided between defense and non-defense reductions, with some small reductions in entitlements contributing to the non-defense side of the ledger. Put another way, once the sequester comes into effect, defense-related appropriations will have to be reduced by $55 billion annually. And these reductions will be of the sledgehammer variety: Every "program, project and activity" will be reduced by the same percentage, regardless of its relative importance to the overall enhancement of national security.

It gets worse. The sequester does not begin to bite until January 2, 2013 -- that is, until the beginning of the second quarter of the upcoming fiscal year. That means that the entire $55 billion must be found from programs that had not yet been obligated during the first quarter of the fiscal year. To the extent that such commitments will have been made, the amount of funding susceptible to reductions will itself be reduced, and the percentage of reductions will accordingly increase. Finally, because President Obama is expected to exempt the military personnel accounts, which total some $141 billion, and Congress is expected to exempt the contingency-related accounts (which are the major source of funding for the war in Afghanistan), there will remain some $375 billion, from which $55 billion will have to be found, resulting in a 15 percent reduction in all other defense programs. 

The impact of that reduction will be highly disruptive to both the current and longer term defense program. It will result in massive reductions in weapons systems, though not in personnel. It will render the pivot to Asia meaningless; any plans for increasing our military muscle in that region will be completely undermined by the reduction in shipbuilding, aircraft, missile, drones, and a host of other acquisition programs. Our presence in the rest of the world will at best fare no better, and, in light of the so-called pivot, will probably suffer even more.

All the foregoing has long been well-known to Washington's defense cognoscenti and especially its bean counters. What is less well-known, and at least equally alarming, is the impact of the sequester on the economy as a whole. As the recently released study by the Bipartisan Policy Center points out (full disclosure: I am a member of the Center's Task Force on Defense Budget and Strategy), the sequester will result in the loss of about a million jobs in 2013 and 2014 and America's GDP will decline by half a percent. Moreover, of these million lost jobs, it can safely be asserted that at least half will come from the non-defense sector. In other words, the sequester is not just a defense problem that should agitate only hawks. It is a national problem, and it demands immediate relief. 

Despite the urgency of the sequester's challenge, the administration continues to sit on its hands. No draft legislation has emerged from the White House that would at least postpone the sequester for a reasonable period to enable Congress to try its hand at another effort to reduce the deficit. The administration's allies on the hill, particularly in the Senate, have been equally nonchalant about the coming programmatic and economic disaster.

Such nonchalance carries with it a very high risk, however, and not only for the economy. In addition to its impact on the government's budget, the sequester will also trigger the WARN Act, which requires employers to give a minimum of sixty days notice to private and public sector employees whose jobs are being targeted for possible termination. Those politicians seeking re-election to national office should take note that Nov. 2, 60 days before Jan. 2, when the sequester comes into force, is just four days before election day. They may find it very uncomfortable having to explain to potentially hundreds of thousands of people who have been given WARN Act pink slips why they deserve to be returned to office after they did nothing about the sequester. America's economic house is burning; the Neros of Washington had better act soon, or they may find that their political fate will echo that of their ancient Roman namesake.

Washington is abuzz with speculation about a possible interim deal that might help defuse the brewing crisis over Iran's nuclear program. Color me skeptical.

That said, one thing seems clear. Iran's increased interest in negotiations has been driven almost entirely by its search for relief from harsh Western sanctions imposed in the last six months.  

A top official from the Obama administration recently told me that "from what we are seeing, the threat of an Israeli strike hardly figures right now in Iranian calculations. On the contrary, everything indicates that what really worries Iran's leaders is the impact of sanctions and the danger that they could spark domestic unrest." Senior Israeli intelligence analysts have reached a similar conclusion, noting in conversations that, "at the moment, Iran doesn't think Israel will attack [without endorsement from the U.S.] . . . . The need for sanctions relief is the reason they're back at the table."

Of course, the centerpiece of the sanctions campaign has been the U.S. decision at long last to target the Central Bank of Iran (CBI). Foreign financial institutions that continue dealing with the CBI to make payments for Iranian oil now risk being cut off from the U.S. banking system. Only countries that show significant reductions in purchases by late June will qualify for exemptions.  

In response, the European Union has agreed to end all imports of Iranian oil as of July 1. Japan -- Iran's second largest customer -- has already secured a U.S. waiver for its efforts to slash imports. Other major purchasers of Iranian crude, including South Korea, India, South Africa, and Turkey, are scrambling to follow suit. There are even signs that China, Iran's biggest buyer, may be reluctantly cutting back, or at least taking advantage of the shrinking demand for Iranian product to negotiate significant price reductions.

At the moment, the impact on Iranian revenues is shaping up to be truly major. Oil sales account for more than half of Iran's national budget. Some estimates now suggest that Iranian exports could drop by as much as 30-40 percent in the next several months. To find buyers for the rest, Iran may well be forced to offer steep discounts, further cutting into its revenue stream. 

As a result, Iran now stands at the precipice of its most severe economic crisis since the devastation of the Iran-Iraq war in the 1980s. With memories of 2009's popular uprising still fresh in their minds, Iran's ruling mullahs are no doubt concerned over the risks they run by continuing down a path of unbridled confrontation, one that promises to double down on the substantial misery they've already inflicted on the Iranian people. Thus -- surprise, surprise -- we get the regime's recent negotiations gambit and the prospect, however slim, of meaningful compromise.

Given the obvious success that CBI sanctions have had in escalating pressure on Iran, an interesting question is why it took so dreadfully long for Washington to pull the trigger. After all, the basic idea of attacking Iran's oil sales by targeting the CBI has been around for years.  I can recall discussions on the topic within the U.S. government as far back as 2006. Indeed, I vividly recall President Bush at numerous meetings beseeching his advisors to provide him new sources of leverage for pressuring Iran, and explicitly raising the idea of going after the CBI. Equally vividly, I recall Treasury Secretary Hank Paulson shooting the idea down, labeling it the "nuclear option" and direly predicting that it would wreak havoc on global markets and the U.S. economy. And that was largely that. The supposed Master of the Wall Street Universe had spoken and further discussion, for all intents and purposes, was closed off.  

Distressingly, what I don't remember is anyone stepping forward to back up Paulson's reflexive conclusion about the unworkability of CBI sanctions with any hard analysis or data. Despite President Bush's obvious interest in the issue, and its potential import on a matter of vital national interest, I don't think any of the relevant agencies -- Treasury, State, the CIA -- ever took it upon themselves to produce a serious study of what the actual impact of CBI sanctions would be on international markets, much less what steps the U.S. might take to mitigate any adverse consequences. Regrettably, I also don't recall any of the president's advisors -- myself included -- ever taking action to challenge Paulson's thesis by tasking the intelligence community to model it systematically. In retrospect, I think it's an instance where the "process," the bureaucracy, clearly failed to serve the president well.

As far as I can tell, a similar failure also beset the Obama administration -- at least until Congress presented it with the fait accompli of CBI legislation late last year. It's widely understood that Treasury Secretary Tim Geithner, like Paulson before him, opposed CBI sanctions, fearing that they would panic the oil markets, send already-high gasoline prices skyrocketing, and tip the U.S. economy back into recession. Once again, the Treasury Secretary's edict was more or less taken on faith, unsupported by serious study and unchallenged by the bureaucracy.

Thankfully, not everyone was quite so complacent. Here, I'm thinking in particular of my colleague at the Foundation for Defense of Democracies (FDD), Mark Dubowitz. Refusing to accept the conventional wisdom that CBI sanctions had to be off the table, Dubowitz led an expert team in systematically analyzing the potential oil market impact. The result was a detailed assessment -- the first, at least as far as I'm aware -- that modeled what would happen to petroleum prices and Iranian revenues under different supply restriction scenarios. FDD's confidential report demonstrated that it would indeed be possible to fashion a sanctions regime against the CBI that could dramatically affect Iranian revenues without triggering a devastating disruption in global energy markets.  

Dubowitz's study provided members of Congress with the analytical tools they needed to push back effectively against the doomsday scenarios, and heavily informed the CBI legislation crafted in late 2011 by Senators Kirk and Menendez that was overwhelmingly adopted. And when the Obama administration finally relented in the face of this Congressional tidal wave, FDD's assessment assisted administration experts in developing a nuanced implementation strategy to maximize pressure on Iranian revenues without triggering a massive oil shock.  

So far, the measure looks remarkably successful. Iran's customer base is dwindling. Those that remain are now in position to demand discounts of as much as 20 percent as Iranian oil increasingly takes on the qualities of a distressed asset. Reductions in the amount of Iranian crude on the market have been adequately covered by corresponding increases in production by countries like Saudi Arabia and Iraq. While the sanctions did coincide with a temporary spike in global prices earlier this year, that seems to have had more to do with a crescendo of speculation about an imminent Israeli military strike than with U.S. action against the CBI.  Accordingly, as that speculation has receded, oil prices have gone down. While the market no doubt remains tight, it has clearly stabilized -- and all the while Iran faces the likelihood of tens of billions of dollars in lost revenues, driving it back to the negotiating table in search of relief.

That a weapon this effective was not deployed several years ago, at a time when Iran's nuclear program was far less advanced, is indeed a great pity. It's also a potent reminder of the kinds of shortcomings that the U.S. government is perfectly capable of -- even when it comes to the most pressing national security issues. And it's as important an example as I can recall of the potentially vital contribution that private think tanks are capable of making to the policy-making process, when they challenge conventional wisdom and bring their intellectual capital and resources to bear decisively on those critical questions that the government, for whatever reason, has neglected, overlooked, or -- quite mistakenly -- already decided that it has all the answers to.  

Trilateral dialogues come in many forms. Those that mix allies with competitors can have the deleterious consequences of diminishing like-mindedness for the sake of inclusivity. More successful trialogues combine like-minded countries that can bring capabilities to bear in ways that cut across national and regional divides, creating an effect that is greater than the sum of its parts.

One of the unfortunate consequences of the rhetoric surrounding the U.S. "pivot" to Asia was the perception that Washington, even as it intensified its commitment to trans-Pacific leadership, was pivoting away from Europe, home to its historic allies. U.S. Assistant Secretary of State for East Asia Kurt Campbell is working hard to correct that interpretation and transcend regional divides -- by leading a U.S. push to coordinate with Europe on Asia in unprecedented ways.

As he told the Trilateral Forum Tokyo organized by the German Marshall Fund of the United States and the Tokyo Foundation today, there are enormous opportunities for the Atlantic allies to work together in a structured, systematic way in rising Asia. These include:

Burma, where a historic political opening can be constructively encouraged (and where backsliding on liberalization can be deterred) through close coordination between the United States and the European Union, including via a graduated loosening of the sanctions that helped spur Burma's military government to opt for managed political change -- and where the allies can bring to bear lessons learned in Europe (for instance, in the Balkans) to support Burma's fragile process of ethnic reconciliation.

China, where U.S. and European concerns over issues like human rights, protection of intellectual property, and rule of law are convergent, and where the West wields much more leverage than commonly understood as a result of being China's dominant trade and investment partners.

Asian institution-building, where no one can teach Asian nations with only a superficial history of multilateral cooperation more about how to build durable and robust regional institutions in the fields of security, trade and investment, and transnational governance.

Security issues, where Europeans have not been pivotal players since the days of gunboat imperialism a century ago, but where a more global Europe must step up its game as competition among Asia's rising and established powers creates dangerous security dilemmas that threaten international security and prosperity.

This is more than just talk: American and European officials now meet regularly on an Asia-specific agenda; the United States and the EU have agreed to roll out a new mechanism for transatlantic cooperation on Asia at the next ASEAN Regional Forum summit this summer. This is an initiative that should be welcomed by Asian officials who overwhelmingly believe Europe punches below its weight in Asia, despite the resilience of European power and ideas in the world, deep economic ties, and the increasingly global impact of developments across the Indo-Pacific region.

The reality is that for too many European nations -- and for too many European Union officials -- China trade policy has been a substitute for an all-of-Asia strategy that encompasses the full spectrum of Western interests and leverages Western ties to powers of great significance, including Japan, South Korea, India, and Indonesia. For their part, American officials until recently have given little creative thought to connecting the two alliance systems that the United States has built and nurtured for 60 years, spanning the Atlantic and Pacific oceans, into a more global arrangement that transcends bureaucratic stovepipes constructed for another era.

Asia's rise is a global phenomenon, not simply a regional one: to take just one example, consider how China's rise affects global energy markets, global governance, and developments in Africa, the Middle East, and Latin America. At the same time, military modernization and intensifying competition within Asia -- between Japan and China, North and South Korea, and India and China, for instance -- implicates Western powers with deep ties to Tokyo, Seoul, New Delhi, and Beijing.

Power shifts within Asia promise to displace existing balances in ways that will require the United States, to sustain its leadership, to secure every advantage it can in a more fluid environment by working with its friends, many of whom are in Europe. From the Asian perspective, every key power has a compelling stake in Europe's ability to emerge from its sovereign debt crisis and restore economic growth. Despite wishful thinking about decoupling between the West and the rest, the global economy cannot grow sustainably as long as Europe, a primary market for and source of Asian trade and investment, is in the grip of recession.

Given the overlapping interests of Asian and Western democracies, it only makes sense to coordinate much more systematically, rather than relying on a set of outdated regional toolkits unadapted to a more globalized century. Similarly, to the extent that China is both a top economic partner and top security concern for so many countries, it only makes sense for them to use their combined influence to manage relations with Beijing from a position of strength -- rather than succumb to a more national approach that will disadvantage every country that cannot alone match China's clout.

For these reasons, the U.S. State Department's effort to bridge that Atlantic and Pacific communities, if matched by seriousness in European and Asian capitals, promises to pay dividends for Western interests in a more non-Western world.

It is bad enough to read that the military has launched a coup in Mali and ousted the democratically elected President Amadou Toumani Touré. Even those of us who believe that Francis Fukuyama made a sound and defensible point about the "end of history" know that there will continue to be setbacks for a long time in much of the developing world. Just because there is now no credible social, economic, or political argument in defense of tyranny does not mean that there won't still be attempts to make that argument by self-serving or even well-meaning putchists.

But it is most disheartening to learn how and why the coup came about just weeks before a scheduled election that was to peacefully replace Touré, only the second democratically elected president of a democratic Mali. Worse still to learn of the reaction to this coup by Malians who should know better.

Mali was somewhat of a success story in the African Sahel region. Only five years ago it hosted the Community of Democracies gathering attended by U.S. Deputy Secretary of State John Negroponte. As we planned for this event (I was then the deputy assistant administrator for democracy and government programs at USAID), there was considerable internal discussion of how well things might go and what the optics would be like for the world's democracy promoters (states as well as NGOs) to gather in Bamako for this important meeting. All were aware that there was of course still much poverty and lack of development in Mali along with unresolved tribal and sectional strife. But the elected government of Touré had been for several years working with the IMF and World Bank and other international donors to cut spending and regulation and improve governance. So it was deemed worthwhile to hold the meeting there. It was a success and the Malian government was a gracious host.

Fast forward to today, a few days after an ill-planned coup by what appear to be incompetent military leaders who have already broken their promises to begin restoring democratic order. Sanctions have been imposed and there are reports that the rebels in the north have taken advantage of the chaos and are furthering their rebellion and implementing sharia law, while as many as 200,000 people are fleeing.

So, democracy has been violently interrupted and al Qaeda, which has designs on Mali as it does in the rest of the Sahel, now has a widening gap in which to insert themselves and to work their wicked will.

But all these problems are compounded by the reaction of the Malians themselves. The coup has been welcomed by various civic groups, peasant leaders as well as other important sectors. Their interest in maintaining democratic processes is as weak, apparently, as the Touré government. The reason is because they have not seen sufficient improvements to their livelihood and an end to the northern rebellion. They have also grown fed-up with the way in which foreign interests have been able to, in their view, exploit the country and its land resources. Their motto is "peace first, elections later."

This is the enduring problem we see in several areas of the developing and democratizing world: Democracy and markets cannot make enough headway before the people become disillusioned to the point of being willing to welcome a coup if it will achieve the objectives they seek. There seems to be no permanent turning away from democracy and polls continue to show that people support democracy and want it for their country. We see this in parts of Latin America, Africa, and Asia. But some people in some states and regions are not willing to endure the progress that democracy can make only slowly. And there is a severe shortage of indigenous far-sighted leaders who should be encouraging the public to work tirelessly and patiently for democratic success instead of taking advantage of public disillusionment and rancor to promote themselves.

This is not a flaw in democracy, representative institutions, or law-based governance. The question is not whether freedom and liberty under law is the solution to lack of development and disorder. They are the only elements that can bring sustained order and progress.

The question is how long will it take and will the public endure the wait? That question is answered only by cultural factors, but Western and international forces can help with wise policy and firm commitments to the democratic path. Now is the time for the West and the U.N. and related organizations to stand shoulder-to-shoulder with African organizations and the leaders of other African countries who are condemning the coup, imposing sanctions, and insisting on a return to normal democratic order. It is also time to support, encourage, and even warn Mali's civil society leaders that they should not make a deal with the devil, as it were, by welcoming violations of democratic order in hopes that good can come of it. Good is very likely not to come of it, especially with a deepening and widening rebellion in the north that the incompetent military cannot control and that is being used to its advantage by terrorist groups like al Qaeda.

In the course of Congressional testimony this week supporting the Obama administration's $525 billion defense spending request for FY 2013, the Pentagon leadership was dire about the consequences of any further cuts to defense. In particular, Secretary Panetta and General Dempsey are seeking to prevent the law going into effect that would require an additional $500 billion to be cut across the coming decade.

The Pentagon leadership professes itself fine with this year's cuts. Panetta has said "the United States military will remain capable across the spectrum. We will continue to conduct a complex set of missions ranging from counterterrorism, ranging from countering weapons of mass destruction, to maintaining a safe, secure and effective nuclear deterrent. We will be fully prepared to protect our interests, defend our homeland and support civil authorities." General Dempsey fully endorsed the new guidance. Yet they both insisted no further cuts were possible without grave damage to our national security.

In seeking to persuade members of Congress to repudiate the 2011 Budget Control Act that established the topline spending levels, Panetta's tactic was to shame: "We have made no plans for sequester because it's a nutty formula, and it's goofy to begin with, and it's not something, frankly, that anybody who is responsible ought to put into effect." To be clear, he is declining to comply with the law.

Dempsey's tactic was to cry wolf: he said that if the sequestration cuts went into effect, "we would not any longer be a global power." This is nonsense. The Budget Control Act necessitates a 15 percent cut to DOD spending across ten years, in a budget that has doubled in the past decade. A budget that constitutes 42 percent of the entire world's defense spending, in a world in which all but two or three of the other big spenders are friends and allies likely to support our endeavors. A budget that after sequestration takes effect will hover at 2004 spending levels -- and the year 2004 was a profligate one in defense spending.

The United States has eleven aircraft carrier battle groups; no other country in the world sails more than one. We have three times as many modern battle tanks, four times the number of fourth-generation tactical aircraft (and are already fielding the fifth generation), more than three times as many naval cruisers and destroyers, 19 times as many tanker aircraft and 48 times as many unmanned aerial vehicles as any other country. The additional public investment since 2001 has also allowed the U.S. military to develop and use cutting-edge equipment such as drones, better body and vehicle armor and more precise bombs. We have an operational and technological edge that is literally pricing our allies out of participation, and that leaves our adversaries incapable of winning so long as we are willing to pursue our objectives.

Secretary Panetta is right that our national interest would be best served by the president submitting a budget that reforms entitlements to put our country on a sustainable spending path. The president has not done that. Secretary Panetta might perhaps take his concern about the devastating effects of sequestration to the president, who has committed to veto any relief for DOD from the Budget Control Act.

But that General Dempsey would project American power as so fragile -- at a time when our strength is being tested on several fronts -- is incredibly injudicious. If he cannot maintain America's ability to operate military forces throughout the world on an annual budget equivalent to our spending in 2004, he does not deserve to be the Chairman of the Joint Chiefs of Staff. Admiral Mullen was right: Our military has lost the ability to budget. We have a whole generation of military leaders with no experience operating cost-effectively. This, too, is a serious deficiency in our defense.

Within the next 24 hours, observers say, we are likely to see an agreement reached among Greek political parties that will clear the way for a second bailout from Europe and the IMF. Observers have been saying this for two months now, but never mind. It is certainly possible that the members of the Greek ruling coalition will meet the demands of "the troika" of lenders -- the European Commission, the European Central Bank, and the International Monetary Fund. And even plausible suggestions of a crisis resolution have tended to bring a feeling of euphoria to markets -- a good Greek word.

There are optimists and pessimists about Euro zone prospects. I'm in the latter camp, but it's interesting to see where the analyses diverge. You would probably get broad agreement that the essence of the euro zone problem is that a number of countries on Europe's periphery have racked up unsustainable levels of debt. There is also a general consensus that if those peripheral countries followed the traditional prescription of devaluing their currency (by leaving the euro zone), this would be a large economic shock for Europe and, thus, for the rest of the world (note, though, the different views among Northern European leaders on whether Greece alone might be expendable).

The divergence in opinion really comes in the analysis of potential solutions. Here are three ways one might look at fixes:

1. Could Europe as a whole handle the debt issue?
This is the question the optimists ask. The answer, they find, is yes, Europe could. While individual countries within the euro zone have debt problems, the zone as a whole is roughly in balance. If everyone agrees that the money is there and that failure to find a solution could be very costly, then it's just a matter of a little obligatory posturing before the money is reshuffled and the matter solved. Another way of putting this would be that economic hurdles are difficult to overcome, but political hurdles are trivial.

2. Could current national leaders in the Euro Zone handle the debt issue? Posing the question this way takes political constraints a little more seriously. While there are certainly now phone numbers and interlocutors for an apocryphal Kissingerian call to Europe, the major players are still national. Chancellor Merkel ultimately answers to a German electorate, President Sarkozy to a French citzenship, and Prime Minister Papademos to a Greek. Those German voters are distinctly unenthused about bailouts and a central bank that is willing to print money to solve problems. Those Greek voters are distinctly unenthused about austerity programs in the face of 19 percent unemployment. With these political constraints, the problem looks significantly harder. The question becomes whether these leaders can overcome the reluctance of their respective electorates and 'do what must be done.' Those who analyze at this level are hanging on every report out of Athens and Berlin.

3. Can countries commit that all future governments will follow the paths agreed today?
This is the pessimists' playground. What happens when leaders fail to persuade their electorates that their unpopular measures were really necessary? They're usually ousted in the next election. There are certainly some policies that, once undertaken, are very difficult to revoke. But the central issues in Europe now revolve around annual national budgets, for which commitments are eminently reversible. One can try to lock in good behavior at a constitutional level -- as much of Europe just did with its brand new fiscal pact, and as it did at the zone's inception with the Stability and Growth Pact. These have proven exceedingly difficult to enforce in practice.

A story on Greek politics in the New York Times nicely captured the essence of this last problem.

"After years of turning its back on its social welfare platform, the Socialist Party, known as Pasok and Greece's dominant political force since 1974, has virtually disintegrated, falling to fifth place with 8 percent support, according to a poll that the firm Public Issue released on Tuesday.

...The most probable winner of future Greek elections would be New Democracy, which held power from 2004 until 2009, when Greece's debt soared from slightly more than 100 percent of its gross domestic product to at least 127 percent.

Its leader, Antonis Samaras, has been criticized repeatedly by European leaders as irresponsible, but with every new tax increase in Greece, some voters are warming to his constant critique of austerity in the absence of growth measures. The party is leading in opinion polls, with Public Issue putting its support at 31 percent of the vote."

The story also noted that "the hard left and extreme right are rising."

Thus, Greek acquiescence today guarantees nothing after the next vote. The magnitude of this problem is not lost on the major European players. In fact, the quest for a solution can be seen as the unifying theme behind Northern European proposals to address the crisis: the fiscal austerity pact, fiscal union, Brussels oversight of national budgets, even political union. Each of these would insulate future tax and spending decisions from the whims of Greek voters.

Barring a momentous development along such constitutional lines, Greek voters still have a say. So if, in the near future, there is an announcement of an accord among current political leaders, the question will be which Greek word is most pertinent: euphoria, or democracy.

The Nov. 23 deadline for a "Supercommittee" budget agreement is fast approaching, and no such agreement is as yet in sight. The Pentagon appears to be panicking over the prospect of sequestration, and with it a reduction of some $600 billion in defense-related spending over the next decade. Secretary of Defense Leon Panetta's warnings have become ever more dire. He has said that sequestration will "invite aggression from U.S. adversaries", that it will result in a "hollow force" of "ships without sailors" and "brigades without bullets."

The Secretary should know better. Not because sequestration, if implemented, would not be a disaster for DoD, but because the absence of an agreement, which would trigger a sequester, does not mean that sequestration will ever come to pass. It is important to note that the sequester would only come into force for the Fiscal Year 2013 budget; in other words, nearly a year must still pass before any cuts are mandated. And the Congress thus has nearly a year to legislate the sequester into the dustbin of history. 

It has happened exactly that way before, as Mr. Panetta knows only too well. He was a veteran of the House Budget Committee in 1988 when the Congress reached a budget deficit agreement that wiped out a $20 billion sequestration that was supposed to have been "automatically" triggered by the 1985 Balanced Budget Emergency Deficit Control Act, popularly known as Gramm-Rudman-Hollings. And he was chairman of the House Budget Committee in 1990, when he played a major role in the enactment of Congressional legislation that again circumvented the 1985 Act by lowering sequestration levels from the "automatic" $16 billion that the Act would have mandated to just over $4.5 billion in budget reductions. Again in 1991, with Mr. Panetta still serving as House Budget Committee chairman, a smaller sequester of some $190 million was rescinded in subsequent legislation that year when the purported savings were found to be the result of a miscalculation.

It is arguable that the long term health of America's defense posture would be better served if the Supercommittee fails to produce an agreement than if it does. It will be much harder for the Congress to rescind a budget deal to which all sides agreed, than to rescind a sequester that was the product of an absence of agreement. Even under the best of circumstances, it is unlikely that Defense could avoid cuts of $200-300 billion in a deal that totals $1.2 trillion; and those cuts will be difficult, if not impossible to restore. On the other hand, the Congress can be expected to rescind sequestration precisely because of the warnings that the Pentagon's top leaders have issued. And once the Congress returns to square one, the prospects for protecting the Defense budget will radically improve.