Europe’s debt crisis often seems like a giant snowball accelerating down a hill. With each rotation, it picks up more destructive power. Squabbling officials are tossed to the side, unable to agree on robust responses. Citizens feel crushed. Financial markets speculate on which country will be flattened next and how that will affect the American economy.
And yet Europe is not facing political or economic collapse. The euro remains a resilient currency. In fact, stepping back from the crisis provides quite a different view. Here, Jacob Funk Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics, sheds light on five trends that – in the long run – will ultimately strengthen the 27-member European Union and the 17 nations that share the euro currency.
AP Photo/Gero Breloer
In the past, it acted more like an enlarged version of the German Bundesbank, devoted exclusively to price stability through inflation control. Like the Federal Reserve, it is now willing to “do whatever it takes” to overcome the effects of chaotic financial markets as it supplies banks with liquidity and purchases government bonds from fiscally troubled countries in the euro area.
This willingness to act and the ECB’s unique position as a supranational central bank – not beholden to any individual government – gives it unprecedented leverage over reform in individual euro-area capitals.
Like the International Monetary Fund – a knight that rescues economies but only if they carry out needed reforms – the ECB in July demanded additional fiscal austerity and labor market reforms from Italy in return for bond purchases of Italian government debt.
That the ECB has made its crisis decisions despite the dissent of Germany, i.e., overruling the euro area’s most powerful nation, shows it can act in a truly Pan-European fashion – even while politicians argue on behalf of their national interests. Europe will need such a strong, independent bank if it is to finally exit from the debt crisis.
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