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The Coming Resolution of the European Crisis: An Update

  • C. Fred Bergsten

    ()

    (Peterson Institute for International Economics)

  • Jacob Funk Kirkegaard

    ()

    (Peterson Institute for International Economics)

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.

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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB12-18.

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Date of creation: Jun 2012
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Handle: RePEc:iie:pbrief:pb12-18
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  2. C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
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