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With Europe's leaders meeting today to take on the difficult task of righting the EU economy , Javier Solana , former General Secretary of NATO and former EU High Representative for the Common Foreign and Security Policy, weighs in at Project Syndicate . Solana argues that the devotion to austerity measures has proven to be a limited solution, at best, to the EU's problems. "Austerity at all costs is a flawed strategy," Solana writes, and he believes that all efforts at this point should go into priming the pump for growth: Public debt, moreover, should not be demonized. It makes financial sense for states to share the cost of public investments, such as infrastructure projects or public services, with future generations, which will also benefit from them. Debt is the mechanism by which we institutionalize intergenerational solidarity. The problem is not debt, but ensuring that it finances productive investment, that it is kept within reasonable limits, and that it can be serviced with little difficulty. Yet, ominously, the same arguments that turned the 1929 financial crisis into the Great Depression are being used today in favor of austerity at all costs. We cannot allow history to repeat itself. Political leaders must take the initiative to avert an economically driven social crisis. Two actions are urgently needed. At a global level, more must be done to address macroeconomic imbalances and generate demand in surplus countries, including developed economies like Germany. Surplus emerging-market economies must understand that a prolonged contraction in the developed world creates a real danger of a global downturn at a time when they no longer retain the room for maneuver that they had four years ago. Within the eurozone, structural reforms and more efficient public spending, which are essential to sustainable long-term growth and debt levels, must be combined with policies to support demand and recovery in the short term. The steps taken in this direction by German Chancellor Angela Merkel and French President Nicolas Sarkozy are welcome but insufficient. What is needed is a grand bargain, with countries that lack policy credibility undertaking structural reforms without delay, in exchange for more room within the EU for growth-generating measures, even at the cost of higher short-term deficits. The world is facing unprecedented challenges. Never before in recent history has a deep recession coincided with seismic geopolitical change. The temptation to favor misguided national priorities could lead to disaster for all. Read Austerity vs. Europe here .

Rohit Arora may not believe in the strength of the US economy right now, but he still believes that current conditions should encourage new business ventures. Arora started Biz2Credit at the height of the financial crisis three years ago. So he has put his money where his mouth is. At Small Business Trends , Arora gives four reasons that now is a good time for startups: 1) Job Growth Is Almost Nonexistent 2) Low-Cost Capital Is Available 3) Technology Makes It Easier to Go Into Business Than Ever Before 4) America Has a Heritage of Entrepreneurship Okay, so the fourth reason is a little less scientific (indeed, Arora might make many economists roll their eyes when he credits small business for leading the US out of past recession), but the others represent classic downturn opportunities. Do you see others? And what are the primary impediments for new business ventures at this stage beyond the uncertainty of the larger economic picture? Read Arora's full post here .

Case Western Reserve 's Scott Shane is trying to figure out whether small business owners are finding it easier to get credit now than during the recession. And, as he shares at Small Business Trends , he's found conflicting data. On the one hand, there is the trend of more loan officers reporting looser credit standards, as Shane shows here: And yet, according to a couple of key surveys, small business owners themselves say they have not seen any loosening of standards. Still, Shane finds some cause for optimism amid all the confusion: Maybe I should look at the bright side. The lack of agreement that small business access to financing got worse in the past year means that the situation is improving. Before the recovery started everyone agreed that small business access to credit had deteriorated. Read the full post here .

Here's a short animated video out of Europe from filmmaker Denis van Waerebeke . It is another simple explanation of one of the story-lines of the global economic crisis. Ecoland - Bubble story from Denis van Waerebeke on Vimeo . (Hat tip Barry Ritholtz )

As those of us in the West are exposed to more stories of successful state-owned businesses in China, Gady Epstein --Beijing bureau chief for Forbes -- reminds us that the spoils of "authoritarian state-let capitalism" have not reached everybody in the world's largest country. There are plenty of losers, Epstein notes, among China's private entrepreneurs. And it appears that the best way to operate as a private investor is to try to fly under the radar, and that means not being too ambitious: Indeed, the best way to stay alive as a private entrepreneur in an industry the state dominates — and there are many of those — is to stay small. “Our principle is that we don’t make trouble for the SOEs, and they don’t consider us competition,” Wang Junjin, chairman of JuneYao Airlines, told me. “Don’t do the things they don’t like. Don’t make them think you’re going to squeeze them out of the market. You cannot step on others to climb up.” Not exactly the capitalist credo you might pick up in business school. In any case, it is difficult to expand without financing, and Chinese state capitalism is terrible at lending to private businesses. This was glaringly true during the financial crisis: While state banks made headlines globally for their gigantic lending spree to mostly state-owned enterprises, thousands of private companies faced bankruptcy, desperate for underground loans at high interest rates ( see “Chinese Credit” for more on where such companies turn for cash). Bank of China Chairman Xiao Gang explained the warped but very rational incentive system that drives bank lending in his commentary last week, “Don’t blame it on the government,” writing: While expanding their loan portfolios, Chinese banks are smart enough to take the risk-averse approach and to focus on lending to large State-owned enterprises (SOEs). These SOEs often enjoy monopoly in their sectors and favorable conditions in an industry and enjoy quasi-government credit ratings. In other words, banks figure the large SOEs won’t go bankrupt and default on their loans. It is not so much that they are too big to fail. They are too government to fail. That was one reason why the president of a third struggling private airline, Okay Airways, told me, “The SOEs laugh at us, ‘Yeah, we’re the government’s companies, of course the government will help us’.” Read The Winners And Losers In Chinese Capitalism here .

Greg Mankiw weighs in on the Obama administration's economic stimulus measures in the Summer 2010 issue of National Affairs . And Mankiw cautions us to look at the macroeconomist models used to determine the state of the economy back at the beginning of 2009, rather than just the measures used to fight economic crisis. Mankiw writes that the Obama administration saw "decline in aggregate demand" as the key problem. Mankiw: So, inspired by the view that fiscal policy can prop up aggregate demand, Obama's advisors (and their congressional allies) began to design a stimulus plan heavy on direct government spending. A few days before President Obama's inauguration, his economic advisors released a document titled "The Job Impact of the American Recovery and Reinvestment Plan," in which they detailed some of their economic assumptions. They determined that the "government-purchases multiplier" — that is, the multiplier for direct spending — would be 1.57, while the tax-cut multiplier would be 0.99. In other words, every dollar spent by the government would yield $1.57 in aggregate demand, while every dollar in reduced taxes would yield only 99 cents in increased demand. And because 1.57 is larger than 0.99, the Obama team concluded it was better to increase spending than to cut taxes. Obama and his advisors arrived at these numbers through a standard macroeconometric model of the sort economists have been using for years. Such models take various past relationships among economic variables (inflation and unemployment, for instance) and extrapolate them into the future. In essence, the economy is modeled as a system of equations, each describing how one variable responds to many others. University of Chicago economist (and Nobel laureate) Robert Lucas famously criticized these models for lacking an appreciation of people's changing expectations; many economists, however, still find such models valuable, and have continued to employ them for forecasting and policy analysis. The question for economists now is whether the administration's assumptions, and the model based on them, were correct. After all, if we could be sure their model was right, we would know what to conclude when their stimulus plan was followed by 10% unemployment: The patient was sicker than they thought, and unemployment would surely have been higher still if not for the stimulus. (Indeed, since Obama's advisors do believe their model was right, this is the conclusion they have reached.) The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model's failure to predict events accurately by insisting that the model was nonetheless right — as Obama's economic advisors have done — is hardly the most obvious course. Careful economists should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity. Read Crisis Economics here .

The Federal Reserve announced a bump in the interest rate for short-term loans to banks yesterday, citing "continued improvement in financial market conditions" as the rationale for the move. From the Fed release : The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread. Global stocks, most notably in Asia, dropped on the news. The dollar, on the other hand, rose. It is now valued at $1.35 against the Euro--the highest it has been in nine months . The move signals that the "era of extraordinarily cheap money," as Andrew Ross Sorkin notes on his DealBook blog, is coming to a close. But beyond that, we are cautioned not to expect major interest rate changes any time soon: Given the slow and uneven nature of the recovery, an unemployment rate close to 10 percent and fears of a new wave of mortgage defaults, particularly in commercial real estate, few economists expect the Fed to begin a campaign of broader interest rate increases quickly or sharply. The central bank reaffirmed last month that the key short-term interest rate it controls would remain “exceptionally low” for an “extended period,” language it has used since March. While borrowing by banks from the Fed’s discount window has already fallen to more historically normal levels from its peak in October 2008, many small and medium-size businesses still find it difficult to obtain loans, a major concern of the Obama administration and Congress. Randall S. Kroszner, an economist at the Booth School of Business at the University of Chicago and a former Fed governor, said after the announcement: “This is a technical change that makes sense as a precondition for other changes, but is not a precursor of short-term change.” Read Fed Rate Move Rattles Stocks here .

One of the biggest hurdles on the path to economic recovery is the commercial real estate sector. Some economists believe the Fed's decision to keep target interest rates at their near-zero level had a lot to do with fears that this sector is not out of the woods yet. Marketplace's Paddy Hirsch explains why commercial real estate is a key place for the Fed to focus right now: Watch out below! from Marketplace on Vimeo .