The Euro Area Crisis: Origin, Current Status, and European and US Responses

Jacob Funk Kirkegaard testifies on the origins of the four principal aspects of the euro area crisis, the recent crises responses by European and US leaders, and the impact of the euro area crisis on US political and economic interests. Since May 2010, the euro area crisis has gradually taken center place in an increasingly volatile global economy. It has become evident that the crisis actually consists of four distinct crises: a design crisis in the creation of the euro area, a fiscal crisis centered in Greece, a competitiveness crisis manifest in large and persistent pre-crisis current account deficits in the euro area periphery, and a banking crisis first visible in Ireland. US policymakers have faced substantial obstacles in dealing with the euro area crisis and have been limited by the fact that the crisis is, despite its increasing global spillover potential, still at heart a domestic economic crisis inside another sovereign jurisdiction. For straightforward reasons of accountability, the euro area crisis should be dealt with overwhelmingly by European policymakers, using European financial resources, and being guided by European political norms, traditions, and institutions. It is in the national interest of the United States to continue to push governance reforms at the International Monetary Fund (IMF) and participate fully in all internationally agreed capital commitments to the IMF to provide the organization with the biggest possible toolkit with which to combat global economic crises in general and the euro area crisis right now in particular.