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Rethinking Global Economic Governance in Light of the Crisisexperiencing. The current fiscal tightening is arguably contractionary, but the alternativeof not reacting to the credibility loss would have produced much worse consequences.Things are more complex for the UK; it hasn’t lost credibility and it borrows at lowinterest rates. Does this mean UK policymakers are shooting themselves in the foot?Are they keeping the economy underemployed for years and thus destroying potentialoutput with their austerity drive? Or, are they wisely forestalling a bond market rebellionlike those seen on the continent that would prove much costlier?Much of the work carried out in the PEGGED project over the years provides aconceptual and analytical framework to address these issues. The question of courseis not only about restoring safer fiscal positions after the large increase in gross andnet public debt in the last few years. Rather, it is about which fiscal policy path wouldbe most effective in helping the global economy and the economy of the Eurozoneovercome the current crisis.This issue requires solution both at country-level, and at regional and global level.International considerations complicate the analysis; a policy which may be perfectlyviable and desirable for a country conditional on an international context, may not workin different circumstances. The outcome will depend on the degree of internationalcooperation, especially in the provision of liquidity assistance and in the establishing of‘firewalls’ against contagion.Fiscal policy at a crossroads: Self-defeating tightening in aliquidity trap?Recent contributions about the mechanism through which fiscal contraction in aliquidity trap is counterproductive have led to an important change in perspective,relative to initial views.A key point here is the recognition that much of the advanced world is currently in anunemployment and underemployment crisis. Destruction of jobs and firms today may28