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Why the Euro Will Survive
Completing the Continent’s Half-Built House
C. FRED BERGSTEN is Director of the Peterson Institute for International Economics. He was U.S. Assistant Secretary of the Treasury for International Affairs in 1977–81 and Assistant for International Economic Affairs to the U.S. National Security Council in 1969–71. Copyright 2012, Peterson Institute for International Economics.See more by this author
As doom and gloom about the euro abound, an increasing number of commentators and economists question whether the common currency can survive. The world economy, they allege, is teetering on the edge of an even deeper crisis than today's.
To be sure, the eurozone faces serious economic and financial problems. The area is in the midst of multiple overlapping and mutually reinforcing crises. The first is a fiscal crisis, which has taken its biggest toll in Greece but pervades the southern part of the eurozone and Ireland. The second is a competitiveness crisis, long evident in the large current account deficits along the eurozone's periphery and the even larger current account imbalances between eurozone countries. The third is a banking crisis, which first unfolded in Ireland and has become particularly acute in Spain.
Yet for all the turmoil, fears of countries' repeatedly defaulting on their debts or the total collapse of the euro are vastly overblown. The eurozone countries have demonstrated that they can and will resolve each successive stage of the crisis by cooperating and sharing decision-making powers. They have created a host of new continent-wide institutions, built a substantial financial firewall to prevent debt problems from spreading, and are now well on their way to creating a banking union and a partial fiscal union. When the dust settles, the common currency, and indeed the entire project of European integration, is likely not only to survive but to emerge even stronger.
WATCH WHAT THEY DO, NOT WHAT THEY SAY
The European crisis is rooted in a failure of institutional design. The Economic and Monetary Union (EMU) that Europe adopted in the 1990s comprised an extensive, if incomplete, monetary union, anchored by the euro and the European Central Bank (ECB). But it included virtually no economic union: no fiscal union, no banking union, no shared economic governance institutions, and no meaningful coordination of structural economic policies.