The coming resolution of the European crisis

by Fred Bergsten and Jacob Funk Kirkegaard

Vox
January 26, 2012

Policy reactions to the Eurozone crisis are seen by many as short-sighted, incoherent, and driven by political expediency. This column disagrees. What we are seeing is a game of chicken among the key political and economic powers in Europe. As the crash looms ever closer, the right deals will be struck and Europe will emerge stronger and with its currency intact.

When things get really difficult ... suddenly solutions which seemed impossible become possible ... Because of this, the crisis represents an opportunity. I'm not saying that I enjoy being in a crisis, but I'm not worried. Europe always moved forward in times of crisis. Sometimes you need a little pressure for certain decisions to be taken.
Wolfgang Schäuble

Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.
Jean Monnet

Doom and gloom about the euro are abundant. An increasing number of commentators and economists have started to question whether the common currency can survive.

The economic and financial problems in the Eurozone are clearly serious and plentiful. The area is in the midst of multiple, frequently overlapping and mutually reinforcing crises.

• A fiscal crisis is centred in Greece but visible across the southern Eurozone and Ireland.
• A competitiveness crisis is manifest in large and persistent pre-crisis current-account deficits in the Eurozone periphery and even larger intra-Eurozone current-account imbalances.
• A banking crisis was first evident in Ireland but is now spreading throughout the Eurozone via accelerating concerns over sovereign solvencies.

We, however, think that these fears are overblown. We believe that the European crisis is political, and even largely presentational. This realisation holds the key to understanding how it has developed and to its solution.