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Tags: Elliott | Euro | Crisis | Cliff

Brookings’ Elliott: Euro Leaders Won’t Resolve Crisis Until They Are At Edge of Cliff

By    |   Thursday, 28 June 2012 03:06 PM EDT

The euro summit in Brussels won’t come close to solving the region’s debt crisis, even as it may make some progress, says Douglas Elliott, an economics studies fellow at the Brookings Institution.

A real solution to the debt crisis won’t come until the eurozone is looking into the abyss, he writes in a CNNMoney column. In other words, politicians, in order to prescribe the needed medicine, have to be convinced their publics are scared enough to accept pain and hardship, he writes.

The ultimate solution will probably require that Germany and the stronger countries guarantee the debt of the peripheral countries like Greece and Spain, he says. And that won’t happen this time around, because to do that, national leaders need to explain to their voters that the alternative is disaster.

The U.S. debt-ceiling debate of last summer is a case in point, he says. That could only be resolved at the very last moment, when outside pressure was so high that politicians were able to gain forgiveness from voters for making the tough choices, he said.

With German unemployment the lowest it’s been in years, it’s hard for Chancellor Angela Merkel to convince the public they face a disaster. Germany and the other stronger countries don’t trust the weak ones to make the reforms needed so the strong countries can avoid bearing the costs when the weaker member default, he writes.

Ultimately, a solution will require euro-area members give centralized euro authorities veto power over their budgets, he says. The citizens of the peripheral countries aren’t yet frightened enough to let their leaders hand over this much power to the euro authorities, he says.

Banks in the region need to be better regulated, with cost of failures equally shared across the euro region to break the links between banks and their national governments. So far, leaders in the stronger countries aren’t willing to write blank checks to support banks in the weaker countries, writes Elliott.

Key European leaders will eventually accept these necessary measures when they are facing a disaster, writes Elliott. But they are not yet standing on the edge of that cliff.

Meanwhile, Merkel prepared to meet Thursday in Brussels with other European leaders following talks in Paris with French President Francois Hollande which highlighted differences between the leaders of the two biggest euro-zone economies, the New York Times reported.

In a speech Wednesday to German lawmakers, Merkel said short-term solutions such as euro bonds would be counterproductive, and she urged creation of a political union among member states, the Times reported. Hollande and other leaders want faster action, it said.

The two-day summit in Brussels will work on the outline of a banking union and a spending plan to stimulate the euro-zone economy, the Times reported. Leaders will also discuss a proposal to create a euro-zone finance ministry that could lead to pooling of debt.

European officials are also working on plans to alleviate the debt burdens of Spain and Italy, the report said.

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Thursday, 28 June 2012 03:06 PM
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