The Coming Resolution of the European Crisis

… according to Bergsten and Kirkegaard of the Peterson Institute.

(…) This policy brief argues that these fears are overblown. We believe that the European crisis is political, and even largely presentational, and that this conclusion is key to understanding how the crisis has developed and how it will be resolved.

The lack of confidence in the euro is first and foremost rooted in a crisis of fundamental institutional design. The Economic and Monetary Union (EMU) adopted in the 1990s comprised an extensive (though still incomplete) monetary union, with the euro and the European Central Bank (ECB). But it included virtually no economic union: no fiscal union, no economic governance institutions, and no meaningful coordination of structural economic policies.

It was assumed by the architects that economic union would inexorably follow monetary union. However, there was no pressure to create an economic union during the expansion period prior to the Great Recession. When the crisis hit, the contradiction triggered severe market reactions that continue to this day.

There are only two alternatives. Europe can jettison the monetary union. Or it can adopt a complementary economic union. This brief argues that, for all the turmoil, Europe is well on its way to completing the original concept…