Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Policy Brief 12-1

The Coming Resolution of the European Crisis

by C. Fred Bergsten, Peterson Institute for International Economics
and Jacob Funk Kirkegaard, Peterson Institute for International Economics

January 2012

View full document [pdf]


The economic and financial problems in the euro area are clearly serious and plentiful. An increasing number of commentators and economists have begun to question whether the euro can survive. There are only two alternatives. Europe can jettison the monetary union or it can adopt a complementary economic union. Every policymaker in Europe knows that the collapse of the euro would be a political and economic disaster for all and thus totally unacceptable. Europe's overriding political imperative to preserve the integration project will surely drive its leaders to ultimately secure the euro and restore the economic health of the continent.

The key is to observe what Europe does rather than what it says. At each critical stage of the crisis, both Germany and the European Central Bank have demonstrated they will pay whatever is necessary to preserve the euro area and avoid defaults (except possibly Greece). But neither can say they will provide unlimited bailouts because this would alleviate the pressure on the debtor countries to reform and weaken the bargaining position of each creditor group (northern European governments, ECB, private lenders, IMF) vis-à-vis the others as they allocate the costs of the bailouts. Europe's key political actors in Berlin, Frankfurt, Paris, Rome, Athens, and elsewhere will thus quite rationally exhaust all alternative options in searching for the best possible deal before at the last minute coming to an agreement. For all this turmoil, however, Europe is well on its way to completing a true economic and monetary union, and will emerge from the crisis much stronger as a result.


 

RELATED INTERVIEWS

Making an Example of Greece January 19, 2012

Is Europe's Shadow Lifting from the United States? February 3, 2012


RELATED LINKS

Policy Brief 13-23: How to Form a More Perfect European Banking Union October 2013

Policy Brief 13-17: A Realistic Bridge Towards European Banking Union June 2013

Op-ed: Five Myths about the Euro Crisis September 7, 2012

Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012

Testimony: Challenges of Europe's Fourfold Union August 1, 2012

Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach August 2012

Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012

Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012

Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012

Book: Resolving the European Debt Crisis March 2012

Policy Brief 12-4: The European Crisis Deepens January 2012

Policy Brief 11-21: What Can and Cannot Be Done about Rating Agencies November 2011

Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011

Policy Brief 10-27: How Europe Can Muddle Through Its Crisis December 2010

Policy Brief 10-14: In Defense of Europe's Grand Bargain June 2010

Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010

Book: The Euro at Ten: The Next Global Currency? July 2009

Op-ed: Europe Must Look East to Deal with the Euro October 11, 2007

Op-ed: Start by Saving the Eurozone October 24, 2008

Speech: The Euro and the World Economy April 27, 2005

Book: The Euro at Five: Ready for a Global Role? April 2005