The LTRO money that banks received on such easy terms, we must recall, took the form of three-year loans, which implies a wall of debt repayment in December 2014 and February 2015. If Europe succeeds in making major fiscal and banking reforms and gets its economy in order, Edward will lose steam. If not, the crisis will persist, and Europe will be rocked as Edward makes landfall by the end of 2014.

Where does that leave developing countries? The US and Europe are the world's two largest economic powerhouses. Their slowdown will have an adverse impact on all emerging economies. Moreover, the US and Europe have already used large doses of fiscal stimulus, which shares an uncanny similarity to antibiotics. Administered over a short duration, it can be a powerful antidote; but, used repeatedly over too long a period, the side effects can outstrip the benefits.

Consider the case of India. Since 2009, India has been expanding its deficit as a deliberate measure to counter its economic slowdown. Because fiscal expansion followed several years of restraint, it was very effective in spurring demand and output growth. But now the scope for further expansion is limited. Unlike developed countries, most emerging economies are exhibiting inflationary pressures, which could be exacerbated by another round of stimulus spending. So the short-run situation remains precarious.

Nevertheless, for emerging economies, the medium- to long-term prospects are bright. Countries that are saving a substantial amount, investing in human capital, and providing a modicum of good governance should resume their previous rapid growth.

India, for example, is saving and investing well over 30 percent of its GDP, devoting a significant share of these resources to infrastructure. Its entrepreneurial capacity is expanding. In several recent years, India's outward direct investment in Britain has exceeded inward direct investment from Britain. So, once the crisis is over, annual growth should rebound to its earlier rate of more than 8 percent.

Investors seem to be taking this view to heart. They have been tightfisted when it comes to short-term equity investments. But, when it comes to long-term direct investment, they committed a record-high $43.8 billion to India in 2011-2012. Beyond the current crisis, the prospect appears to be similar in other major emerging economies, including Brazil, China, and Indonesia.

Easing short-term jitters and paving the way for further in developing countries' growth will require a clear and credible program for returning high-income economies, especially those in Europe, to a sustainable fiscal path. It will be a bumpy road ahead, requiring careful navigation and bold policy implementation.

The author is senior vice-president and chief economist of World Bank and professor of economics and C. Marks Professor of International Studies at Cornell University.

Project Syndicate

(China Daily 01/04/2013 page9)