Europe’s financial troubles will probably lead the EU and the eurozone to a stronger fiscal system – but only after a bumpy ride this year, according to Simon Johnson, a U.S- based economist who has been prescient about the crisis. In his view, the eurozone can weather an intensifying financial whirlwind at the cost of three crucial conditions:
- Greater fiscal integration for a core set of countries. Germany will end up underwriting more of the weak countries’ debts, but only with guarantees of more collective discipline.
- For the core countries, the European central bank (ECB) will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary.
- The departure of one or more weaker countries from the eurozone.
“At the end of the day, the Europeans will save themselves, with the measures outlined above – only because there will be no other way to avoid wasting 60 years of political unification. But this action won’t ‘save’ everyone; one or more countries will be forced out of full eurozone membership (although they will likely keep the euro as the means of exchange). And the costs to everyone involved will be large,” Johnson writes in this cogent overview on his highly regarded website, The Baseline Scenario. U.S. readers should not react smugly to Europe’s hard choices, Johnson warms.: “Don’t smile as you read this, because this same logic points directly to a deep and morally disturbing crisis heading directly at the United States.”
Kurt Moss is an Editorial Assistant at European Affairs.