The Future of the Euro Area
by Simon Johnson, Peterson Institute for International Economics
Prepared statement presented before the US Senate Committee on Foreign Relations Subcommittee on European Affairs hearing on "The Future of the Eurozone: Outlook and Lessons"
August 1, 2012
View full document [pdf]
- Successive plans to restore confidence in the euro area have failed. The market cost of borrowing is at unsustainable levels for euro banks and a significant number of governments.
- Two major problems loom over the euro area. First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession. This has increased the financing needs of troubled nations well into the future.
- With governments reaching their presumed debt limits, the European Central Bank (ECB) is now treading a dangerous path. It feels compelled to provide adequate "liquidity" to avert systemic financial collapse, yet must presumably limit its activities in order to prevent a loss of confidence in the euro—i.e., a change in market and political sentiment that could lead to a rapid breakup of the euro area.
- Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the ECB, (4) the introduction of mechanisms that credibly achieve medium-term fiscal sustainability, and institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.
- Europe's leaders have mainly focused on a potential long-term fiscal agreement, and the ECB under Mario Draghi is setting a more relaxed credit policy; however, the other elements are essentially ignored.
Testimony: Sovereign Bond Purchases and Risk Sharing Arrangements: Implications for Euro Area Monetary Policy
Testimony: European Banking Union: Current Outlook and Short-Term Choices
February 26, 2014
Policy Brief 13-23: How to Form a More Perfect European Banking Union
Op-ed: The ECB Can and Should Make the ABS Market Happen
June 4, 2014
Policy Brief 13-17: A Realistic Bridge Towards European Banking Union
Op-ed: Five Myths about the Euro Crisis
September 7, 2012
Article: Why the Euro Will Survive: Completing the Continent's Half-Built House
August 22, 2012
Testimony: Challenges of Europe's Fourfold Union
August 1, 2012
Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach
Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups
Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update
Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012
Book: Resolving the European Debt Crisis March 2012
Policy Brief 12-4: The European Crisis Deepens
Policy Brief 11-21: What Can and Cannot Be Done about Rating Agencies
Working Paper 11-2: Too Big to Fail: The Transatlantic Debate
Policy Brief 10-27: How Europe Can Muddle Through Its Crisis
Policy Brief 10-14: In Defense of Europe's Grand Bargain
Op-ed: New Imbalances Will Threaten Global Recovery
June 10, 2010
Book: The Euro at Ten: The Next Global Currency? July 2009