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The Coming Resolution of the Euro Crisis

Bergsten & Kirkegaard, Peterson Institute for International Economics | July 2012

Since 2010 many pundits and financial analysts have constantly proclaimed that EU leaders only have three months to save the Euro. The general mood and the outlook gets more and more pessimistic. Thus, the policy brief by Fred Bergsten and Jacob Funk Kirkegaard presents a welcome change of tune. The director and research fellow of the Peterson Institute for International Economics argue that many analysts and market gurus "have their own political and market positioning reasons for making such comments" and advise to "attach limited importance to them."

Their main thesis is that Europe has more time to solve the euro crisis than financial markets and analysts think. Bergsten and Kirkegaard put forward the "on the brink" theory to characterize the current process of European economic integration. "An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. (...) Ultimately, the threat of imminent collapse of the European financial system and indeed the common currency itself would prompt euro area policymakers to take every feasible step to avoid it, including transferring sovereignty to new institutions."

The authors argue that the European Central Bank retains far more financial firepower than is often pertained, especially when compared with the US Federal Reserve and the Bank of England. They call upon the EU Council to begin a new stage of European integration by taking long-term decisions on banking and fiscal union. Bergsten and Kirkegaard conclude: "Only two things seem certain in this crisis: that the euro will survive and emerge stronger from the crisis and that, given the fundamental differences between Europe and America, the euro area fiscal and political union will not look anything like the American one. Fortunately, it does not need to."

Download the policy brief here

C. Fred Bergsten has been director of the Peterson Institute for International Economics since its creation in 1981. Jacob Funk Kirkegaard has been a research fellow at the Institute since 2002.


Tags: | euro | Euro Crisis |

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