Breakup of the eurozone would prompt global recession

Then there is the rest of the world. Europe is still the globe’s largest economic area, and the most inter-linked financially. As such, disruptions would inevitably be transmitted to the rest of the world. And with the United States already struggling to maintain meaningful economic growth and job creation, a global recession would materialize.

All this speaks, of course, to why the political narratives have repeatedly sought to rule out a fragmentation of the eurozone; it is also why leaders of other countries have put pressure on their European counterparts to address the regional crisis in a more determined and holistic manner.

But words and moral suasion are grossly insufficient to stop the forces of fragmentation that have been enabled by important design flaws and fueled by years of policy responses that have been tactical rather than strategic, sequential rather than simultaneous, and partial rather than comprehensive.

Only by understanding the enormity of the risks that they face do the leaders of Europe stand a chance of overcoming persistent internal tensions and converging on a potentially game-changing response.

And only then would they be able to convince a skeptical citizenry of the necessity of taking truly unprecedented steps: first, to reform the eurozone into a more coherent union that is smaller, less imperfect, and more robustly designed and operated; second, to ensure that this reformulated eurozone can move forward in generating growth and jobs; and third, to safeguard the broader functioning of the European Union.

Having bickered and dithered for too long, European leaders no longer have at their disposal a neat, relatively costless, and highly certain solution for the regional crisis.

What they do have is some time – though not much – to attempt to defend the integrity of the regional integration project by taking bold steps now, starting with an economic, fiscal and banking union, and moving toward a political union.

Yes, the outcome is far from guaranteed, and inevitably there would be immediate disruptions. But all this pales in comparison to the catastrophe that Europe and the world would experience if Europe continues with an approach that remains too little and too late.

Germany and the core need to decide boldly whether they believe that the eurozone can survive and in what format. If the answer is yes, then the pursuit of a less imperfect union would need to be accompanied by massive official financing – both fiscal and from the European Central Bank – to the periphery to smooth the painful adjustment through austerity, reforms, and internal devaluation.

If, instead, they were to decide both that the eurozone is not viable as is and that a smaller union is not achievable, the costs of breaking up disorderly later rather than breaking up now would be much larger. What should not and must not happen is for the eurozone to remain in its current muddled middle.

Nicolas Berggruen is chairman of the Council for the Future of Europe. Mohamed A. El-Erian is CEO of PIMCO, the global investment management firm. Nouriel Roubini teaches at New York University and is chairman of Roubini Global Economics.

© 2012 Nicolas Berggruen Institute/Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.

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