CIAO DATE: 07/2011
December 2010
Peterson Institute for International Economics
Europe's financial market contagion is infecting systemically important eurozone members, causing a rise in demands that European policymakers make greater strides toward solutions. While Jacob Funk Kirkegaard believes that the European Union will do "whatever it takes" to save the euro and the eurozone, he argues that powerful political constraints prevent EU leaders from making optimal decisions. Europe can get through the current crisis by producing a compromise among member states in the form of a permanent European Stability Mechanism (ESM) with an option to issue a conditional Eurobond, which would aid eurozone members suffering asymmetric economic shocks in return for taking domestic reforms to return to a sustainable fiscal path. An ESM with a conditional Eurobond option offers a less clear-cut solution than a full fiscal union, a straightforward Eurobond, European Central Bank money-printing, or a breakup of the eurozone.
Resource link: How Europe Can Muddle Through Its Crisis [PDF] - 157K