December 9th, 2011
12:56 AM GMT
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(CNN) - In the words of the chief executive and co-chief investment officer of Pimco, Mohamed El Erian: "This is Europe's moment of truth. For the sake of the region and that of the global economy, its leaders must come up with a solution at a time when, to use Nicolas Sarkozy's phrase, `the euro needs to be refounded’.”

Lest we forget, the problems of the eurozone have developed from a sovereign debt crisis, into a liquidity and – dare I say it – a solvency crisis. It has created all the ingredients for a banking meltdown that could cripple global growth.

So what are the chances of a final solution in Brussels this week? Pretty weak, I would say.

The likelihood is that Europe's leaders will sign off on what they call a "fiscal compact" deal – a partial solution, if you like, which will commit all 27 members of the EU to much tighter control of public finances and, in the longer term, the possibility of joint debt issuance.

What Europe really needs is a proper "fiscal union" with all the tax-and-spend implications that would entail. But that risks a bruising fight between euro and non-eurozone members which could ultimately lead to two-tier Europe going forward.  Time is running out.  That's a situation we can ill afford at this stage.

So Europe's leaders will hope that this "fiscal compact" deal will be enough to convince markets of the viability of the euro going forward. Like it or not, the ECB’s move Thursday showed quite clearly that the central bank isn't prepared to shoulder the burden of solving this crisis alone.

“Those who believe in Colin Powell's doctrine of ‘overwhelming force’ will argue that, at a time of great crisis, the ECB is being too measured, too timid and too refined," said El Erian. "Others will congratulate the institution for positioning itself for success in a marathon rather than an exhausting and disappointing sprint.”

soundoff (6 Responses)
  1. Charles

    I'm French and I've been against the eurozone since day 1. It's failure is very simply the outcome of a flawed concept. You cannot trust fiscal liabilities that are with those who see these policies to be conducted differently and most importantly - beyond your control. The EU will never be a union which resembles the federalism in the United States. The UK was smart when they didn't join.

    December 9, 2011 at 1:30 am |
  2. truthhurtsss

    Why do "analysts", "heads of research", CNN writers", "Bloomberg writers", etc, keep expecting and hoping that there is (or are) a solution to all these mess of debts? Are they ignorant, in a state of denial or plain idiots? How can you have a "solution" to all those debt problems? Those banking debts, sovereign debts, household debts and etc debts.

    Can't these people do a few simple arithmetic calculations? There is no way out of this mess! There is just no way to pay off the debts! If this kind of talk or expectation came from Bernanke, Obama, Geithner or all those self-serving politicians and office-bearers(including European ones), I can understand their self-serving motives, but from people who should be of the "other side"????

    "There is NO MEANS OF AVOIDING a final collapse of a boom brought about by credit expansion. The ALTERNATIVE is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." – Lugwig von Mises

    December 9, 2011 at 4:45 am |
  3. truthhurtsss

    Unfortunately, Lugwig von Mises also has an answer as to why these idiots keep expecting a "solution":

    "No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion."

    December 9, 2011 at 5:07 am |
  4. Paul Johnston, PhD Economics


    Paul Johnston, PhD Economics

    December 9, 2011 at 6:00 am |
  5. WB

    For all the weak-kneed, impulsive, panic-ridden jibber-jabbers, who are probably in short positions, the Euro has the potential to do what no other currency can do, that is provide a solution that will make it the indomitable world currency. Why? The solution will involve a level of transparency and accountability no other currency has. When the US market faces the same crisis in the next few years, will the leaders try to inflate their way out or just go bust.

    December 9, 2011 at 10:35 am |
  6. WB

    Remember the US has cities in bankruptcy and some states in unofficial bankruptcy. Has the dollar collapsed? When you can't borrow money, it doesn't mean the money is no good, it means your credit is no good. The governments in trouble are the ones borrowing for operational costs, not new projects. Those operational costs will be cut.

    December 9, 2011 at 10:39 am |

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