European governments are now faced with a challenge. Option 1: they could ignore the current 2 percent inflation rate, cut interest rates fast and abandon the notion of holding their budget deficits below 2 percent of GDP–a requirement under the stability pact the EU countries all signed in the mid-1990s as a prudent fiscal measure to support the introduction of the euro.
The alternative is to go with a more classically European response: stick to the rules, and meet the 2 percent deficit by raising taxes or slashing spending. But this would hardly be a great idea if the global economy does indeed enter a recession. From here, neither option looks promising.
