The answer is bleak, with little upside potential and a lot of downside risk.

THE global economy ends 2010 more divided than it was at the beginning of the year.

On one side, emerging-market countries like India, China, and the South-East Asian economies, are
experiencing robust growth. On the other side, Europe and the United States face stagnation indeed,
a Japanese-style malaise and stubbornly high unemployment. The problem in the advanced
countries is not a jobless recovery, but an anaemic recovery or worse, the possibility of a double-dip
recession.

This two-track world poses some unusual risks. While Asia's economic output is too small to pull up
growth in the rest of the world, it may be enough to push up commodity prices.

Meanwhile, US efforts to stimulate its economy through the Federal Reserve's policy of “quantitative
easing” may backfire. After all, in globalised financial markets, money looks for the best prospects
around the world, and these prospects are in Asia, not the United States. So the money won't go
where it's needed, and much of it will wind up where it's not wanted causing further increases in
asset and commodity prices, especially in emerging markets.

Given the high levels of excess capacity and unemployment in Europe and America, quantitative
easing is unlikely to trigger a bout of inflation. It could, however, increase anxieties about future
inflation, leading to higher long-term interest rates precisely the opposite of the Fed's goal.

This is not the only, or even the most important, downside risk facing the global economy. The
gravest threat comes from the wave of austerity sweeping the world, as governments, particularly in
Europe, confront the large deficits brought on by the Great Recession, and as anxieties about some
countries' ability to meet their debt payments contributes to financial market instability.

The outcome of premature fiscal consolidation is all but foretold: growth will slow, tax revenues will
diminish, and the reduction in deficits will be disappointing. And, in our globally integrated world, the
slowdown in Europe will exacerbate the slowdown in the United States, and vice versa.

With the United States able to borrow at record-low interest rates, and with the promise of high
returns on public investments after a decade of neglect, it is clear what it should do.

A large-scale public investment programme would stimulate employment in the short term, and
growth in the long term, leading in the end to a lower national debt. But financial markets
demonstrated their shortsightedness in the years preceding the crisis, and are doing so once again,
by applying pressure for spending cuts, even if that implies reducing badly needed public
investments.

Moreover, political gridlock will ensure that little is done about the other festering problems
confronting the American economy: mortgage foreclosures are likely to continue unabated (legal
complications aside); small and medium-sized enterprises are likely to continue to be starved of
funds; and the small and medium-sized banks that traditionally provide them with credit are likely to
continue to struggle to survive.

In Europe, meanwhile, matters are unlikely to be any better. Europe has finally managed to come to
the rescue of Greece and Ireland. In the run up to the crisis, both were governed by right-wing
governments marked by crony capitalism or worse, demonstrating once again that free-market
economics didn't work in Europe any better than it did in the United States.

In Greece, as in the United States, a new government was left to clean up the mess. The Irish
government that encouraged reckless bank lending and the creation of a property bubble was,
perhaps not surprisingly, no more adept in managing the economy after the crisis that it was before.

Politics aside, property bubbles leave in their wake a legacy of debt and excess capacity in real
estate that is not easily rectified especially when politically connected banks resist restructuring
mortgages.

To me, attempting to discern the economic prospects for 2011 is not a particularly interesting
question: the answer is bleak, with little upside potential and a lot of downside risk. More importantly,
how long will it take Europe and America to recover, and can Asia's seemingly export-dependent
economies continue to grow if their historical markets languish?

My best bet is that these countries will maintain rapid growth as they shift their economic focus to
their vast and untapped domestic markets. This will require considerable restructuring of their
economies, but China and India are both dynamic, and proved their resilience in their response to
the Great Recession.

I am not so bullish on Europe and America. In both cases, the underlying problem is insufficient
aggregate demand. The ultimate irony is that there are simultaneously excess capacity and vast
unmet needs and policies that could restore growth by using the former to address the latter.

Both the United States and Europe, for instance, must retrofit their economies to address the
challenges of global warming. There are feasible policies that would work within long-term budget
constraints.

The problem is politics: in the United States, the Republican Party would rather see President
Barack Obama fail than the economy succeed. In Europe, 27 countries with different interests and
perspectives are pulling in different directions, without enough solidarity to compensate. The bailout
packages are, in this light, impressive achievements.

In both Europe and America, the free-market ideology that allowed asset bubbles to grow unfettered
markets always know best, so government must not intervene now ties policymakers' hands in
designing effective responses to the crisis. One might have thought that the crisis itself would
undermine confidence in that ideology. Instead, it has resurfaced to drag governments and
economies down the sinkhole of austerity.

If politics is the problem in Europe and America, only political changes are likely to restore them to
growth. Or else they can wait until the overhang of excess capacity diminishes, capital goods
become obsolete, and the economy's internal restorative forces work their gradual magic. Either
way, victory is not around the corner. Project Syndicate, 2010

Joseph E. Stiglitz is a professor at Columbia University and a Nobel laureate in Economics. His
latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in
French, German, Japanese and Spanish.