The festering sovereign debt crisis in the eurozone and its many repercussions on government spending and bank lending mean that the probability that Europe will experience a recession this year is high—despite recent slightly encouraging data on purchasing intentions. The recession could be mild under a business-as-usual scenario or extreme if the eurozone unravels.

Measures that policy makers could take to mitigate the recession (though it may be too late to prevent it as large economies cannot turn on a dime) come under four headings. In rough order of importance, they are:

1. Build a firewall to reassure investors that Italy and Spain will be protected—in my view this requires adding about a trillion dollars to IMF resources and another trillion dollars to the combined European rescue funds. These are large sums designed to ensure that Italy and Spain can fund their maturing debts and ongoing primary deficits for three years, giving them time to adjust under strict IMF supervision.

2. The European Central Bank should cut its policy rate to zero, continue to provide and expand its three-year lending facility for banks as needed, and continue to provide a temporary and limited backstop to buy government bonds while the expanded IMF-EU facilities are being put in place.

3. Germany, the Netherlands, and other European countries with large current account surpluses should expand government spending and/or reduce taxes and encourage higher wage settlements.

4. Structural reforms must accompany the budget cutting that is an inevitable part of nursing the periphery back to health. These reforms are needed to reestablish competitiveness in the periphery and reignite its growth. Even though they can take a long time to work, their effect on confidence in the short run is considerable.

A depreciation of the euro will also help mitigate the European recession and restore the competitiveness of the periphery. In addition, Europeans will need help from the rest of the world, both in the form of support for expanded IMF facilities and in increasing demand for their exports. The United States should contribute to expanded IMF facilities, contrary to its present stance, because the fund is an insurance policy against a possible global depression that would hurt all Americans.