LAST year it was banks; this year it is countries. The economic crisis, which seemed to have eased off in the latter part of 2009, is once again in full swing as the threat of sovereign default looms.

Europe's leaders are struggling to avert the biggest financial disaster in the euro's 11-year history (see article). This week all eyes have been on Greece. If it defaults, it will be the first EU member to do so. As The Economist went to press EU leaders were meeting to discuss what to do, and there was talk of a German-led rescue scheme. If it happens, other European candidates may be queueing up. Bond markets are worried about the capacity of Spain (see article), Ireland and Portugal to repay their debts, forcing these countries to increase taxes and cut spending, even as they remain mired in recession.

Europe's troubles have given investors good reason to worry; but they are not the only cause for concern. Policy changes around the world have also spooked investors. China's government began to rein in its lending binge last month, worried about accelerating inflation and asset bubbles. India's central bank has raised reserve requirements and Brazil's fiscal stimulus is being phased out (see article). The rich world's big central banks are gradually unwinding the emergency liquidity facilities they introduced at the height of the crisis. “Quantitative easing”, the process of printing money to buy longer-dated securities, is coming to an end—or at least being put on hold.

All this has knocked asset prices. Stockmarkets are down sharply, commodity prices have tumbled and volatility is up. The MSCI World Index of global share prices has fallen by almost 10% from its peak on January 14th. Optimism about a “V”-shaped recovery is being replaced with pessimism about a double-dip recession, as fears grow that policymakers will be forced, or will mistakenly choose, to remove monetary and fiscal props too soon.

Acropolis now?

Three factors will determine whether such fears are justified. The first is the strength of the recovery—whether it is self-sustaining, or still propped up by government stimulus. The second is the scale of the sovereign-debt problems—whether Greece is a basket-case all of its own, or investors lose confidence in other heavily indebted governments. The third is the deftness with which the world's central bankers and finance ministers design and co-ordinate the withdrawal of policy stimulus (see article).

The picture on global growth is increasingly split. Big emerging economies are in the best shape, with strong growth in domestic demand and scant spare capacity. Countries such as India and Brazil have largely put the downturn behind them. Given the scale of its government-directed lending binge, China's economy is vulnerable to a sudden clampdown by bureaucrats. But, for all the markets' worries, there are few signs that it will tighten too much too fast. A slowing is possible, indeed desirable, but a serious stumble seems unlikely.

Not so in the rich world, where there are still few signs of strong private-demand growth. America's latest, buoyant, GDP figures are misleading. Output grew at an annualised rate of 5.7% in the fourth quarter of 2009 mainly because firms were rebuilding their stocks. With the economy still shedding jobs (albeit at a lower rate), share prices falling, the housing market still wobbly and household debt shrinking, consumer spending is likely to remain subdued. Nor, with plenty of capacity sitting idle, are firms likely to go on an investment binge. In Europe and Japan the situation is far grimmer. Though exports are recovering, Japan has slipped back into deflation. In the euro zone, recovery was faltering long before the Greek crisis hit. Domestic demand has stalled even in countries, such as Germany, where households have no excess debt to pay off.

Searching for the exit

This disparity between the rich and emerging worlds should be reflected in their macroeconomic policies. Emerging economies can, and should, unwind their stimulus and raise interest rates before inflation takes off. But in big, weak, rich economies it is still too soon to tighten. The dangers of repeating the mistakes made in America in 1937 and Japan in 1997—when premature tax increases and tighter monetary policy pushed fragile economies back into recession—are greater than the risks of inaction. With output so far below potential and credit growth stagnant, there is little chance of sustained inflation. Nor, in most countries, should fear of bondholders lead to sudden fiscal austerity. The right lesson to draw from the travails of Greece, Spain and Portugal is not that all deficits today are dangerous, but that governments need to do more to control their deficits and boost economic growth in the medium term in order to make room for looseness today.

Most big, rich economies have absorbed half that message. At their gathering on February 6th, the G7's finance ministers concluded, rightly, that it was too early to begin withdrawing stimulus. But no rich country has laid out a credible, medium-term fiscal plan. Top of the list should be reforms, like raising the retirement age or means-testing future benefits, which improve countries' fiscal outlook without crimping demand today. France is leaning in the right direction, with its mooted overhaul of the pension system. America's new budget, which simply punted on the medium term, was a shocking failure in that regard.

Equally important is a more explicit agenda to boost growth in the medium term. To minimise the risk that they fall into a Japanese-style morass of high public debt and slow growth, the rich world's economies must spur productivity, encourage investment and foster competition. That points to a renewed focus on freeing trade, cutting spending rather than raising taxes and agreeing on new financial regulations.

Some of today's nervousness comes from “policy risk”. Nobody—neither firms, banks nor individuals—is quite sure where government policy is going. The more that governments can do to reduce such uncertainty, the stronger the recovery is likely to be.