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The Coming Resolution of the European Crisis: An Update

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  • C. Fred Bergsten

    () (Peterson Institute for International Economics)

  • Jacob Funk Kirkegaard

    () (Peterson Institute for International Economics)

Abstract

The euro crisis is fundamentally a political crisis. At its core the crisis is about national sovereignty and the process in which European governments can agree to transfer it to new, required euro area institutions governing banking sectors and fiscal policies. This transfer of national control over domestic banking sectors and fiscal policy, say Bergsten and Kirkegaard, will happen only during an extraordinary crisis. An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. For this reason, the euro area policy response can only be reactive. Proactive decisions to resolve the crisis in one fell swoop are politically impossible and unrealistic. The authors put forward the "on the brink" theory to characterize the current process of European economic integration. 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 threat, while it exists, is not as imminent as most mainstream commentary makes it out to be. Europe is more solid and has more time to fix its problems than financial markets and analysts think. But leaders urgently need to take a number of very far-reaching political decisions, in particular on banking and fiscal union, during 2012. Every gradual step, however small, that policymakers take on the brink is a step toward completing the decades-long political project and should not be underestimated.

Suggested Citation

  • C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis: An Update," Policy Briefs PB12-18, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb12-18
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    References listed on IDEAS

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    1. C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    3. Kruse, D. C., 1980. "Monetary Integration in Western Europe," Elsevier Monographs, Elsevier, edition 1, number 9780408106665 edited by Duchêne, François.
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    1. repec:bla:jcmkts:v:55:y:2017:i:4:p:744-761 is not listed on IDEAS
    2. Hughes Hallett, Andrew & Martinez Oliva, Juan Carlos, 2015. "The importance of trade and capital imbalances in the European debt crisis," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 229-252.
    3. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2013. "Granger-causality in peripheral EMU public debt markets: A dynamic approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4627-4649.
    4. Edwin M. Truman, 2013. "Asian and European Financial Crises Compared," Working Paper Series WP13-9, Peterson Institute for International Economics.
    5. Emilios Avgouleas & Douglas W. Arner & Uzma Ashraf, 2014. "Regional financial arrangements: lessons from the Eurozone crisis for East Asia," Chapters,in: Global Shock, Risks, and Asian Financial Reform, chapter 10, pages 377-415 Edward Elgar Publishing.
    6. Miguel Otero-Iglesias, 2015. "Stateless Euro: The Euro Crisis and the Revenge of the Chartalist Theory of Money," Journal of Common Market Studies, Wiley Blackwell, vol. 53(2), pages 349-364, March.
    7. Hellebrandt, T. & Posen, A.S. & Tolle, M., 2012. "Does monetary cooperation or confrontation lead to successful fiscal consolidation?," Financial Stability Review, Banque de France, issue 16, pages 131-142, April.

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