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U.S. and Europe at Risk of “Self-Induced Stagnation,” says Economist Editor

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Global markets let out a huge sigh of relief last week that resulted in a big buying spree after European leaders agreed on a framework to work through their sovereign debt crisis.

The problem, even if the plan is to work, which the markets are starting to doubt, is that the deal doesn't really help the economic fundamentals. In fact, austerity has taken hold (justifiably so) across the continent to ensure debt burdens don't get even more out of control. That kind of fiscal contraction can be good for budgets but bad for growth.

In the accompanying video, Aaron Task discusses the global economic outlook with Zanny Minton-Beddoes, economics editor at The Economist.

"I'm less worried marginally than I was about a month ago, but I'm a lot more worried than I was 6-months ago," says Minton-Beddoes. Don't mistake that for a bullish call. Minton-Beddoes is worried about growth prospects in Europe and the U.S.. Things, she says, "still looking pretty grim on both sides of the Atlantic."

Europe still looks "grim" because despite the debt agreement the growth prospects look weak suggesting some countries are probably already in recession.

In the U.S., Minton-Beddoes says, the greatest economic risk is political. She fears politicians will continue to denounce government spending which will result in fiscal contraction at a time when the economy remains weak and unemployment still high. She refers to this risk as: "self-induced stagnation"

The emerging markets, namely China looks "rosier. " "All indications seem to be the Chinese are in fact engineering exactly what they want which is a soft landing with slower growth but not a sudden slump," she says. That could be the global economy's saving grace, since she calls China the most important economy in the world right now.