Recent events on both sides of the Atlantic may suggest that the corner has been turned on the European financial crisis and that also America's issues with the debt ceiling, fiscal cliff and growth will be finally an object of a compromise in Congress. We may be rejoicing prematurely. Whilst in Europe there is little understanding of the governance issues that prevent the U.S. from arriving at a quick solution of its main economic issues, in the U.S. there lingers an air of doubt about the determination and decisions of the Eurozone leaders. The solution to the sovereign debt crisis and the restoration of confidence in the European project are critical for the economic growth not just of the region: it is in America's interest and crucial to the stability of worldwide financial markets.
The crisis of sovereign debt in Europe revealed the limitations of the Euro. It is a common currency for 17 EU member states, which participate in a common market, but are prevented from independent common monetary policies. Such rigidity, during a combined solvency and liquidity crisis, has had perverse effects such as divergent pressure on interest rates, drawing capital from weak to strong countries. All this put at stake the very fundamental reason for the European Union's existence: the convergence process towards a stronger and lastingly stable economic area. Market perceptions of differences between EU members will dissipate only if Europe takes bold steps towards a deeper integration. Europe will then again be perceived as a 'union,' aiming to be one day similar to the U.S. With market confidence restored, also the debt crisis would be largely resolved.
Europe is at a crucial stage of its development. Failure to forge a clear, credible and timely pact in the direction of a political union may imply as one of the further possible future option a smaller Eurozone and, eventually, a smaller Union, comprising only those members with similar (and strong) economies and with limited or no aim to arrive at a political goal. It's a scenario which, at the moment, all European partners simply rule out. But Europe must make this statement credible and demonstrate confidence in pushing for a deeper integration as the solution.
But, as also U.S. troubles in addressing the debt ceiling and the fiscal cliff impact substantially the financial markets, implications for the US economy of Europe's continued inability to address its structural problems may become enormous. Therefore, the U.S. support for the European project is critical.
Europe must return to a long term credible path and vision on the future of Europe, aiming at a sustainable political model that may be a bridge to a (currently) maybe distant political union, but sufficient at least to restore the credibility in the convergence amongst EU members. The U.S. should declare the Transatlantic area as its core area of interest also for the long term.
As a decisive first step of strategic importance, a U.S.-EU Comprehensive (Free) Trade Agreement should be negotiated and concluded soon. It is clear that such an agreement may have implication on the long term exchange ratios between the US dollar and the Euro. And it is precisely this aspect that may represent one of the most important consequences of such an agreement, as it will be a major step towards a reinvented and closer Transatlantic Community paving the way to a renovated "Bretton Woods" style agreement amongst the two areas.
As a consequence, a "tightened" economic area will create the embryo for a future common market, something to consider for the medium term. In this scenario, only a continued, close cooperation between the two sides of the Atlantic may represent the way ahead. In return this will ensure that the US and Europe will keep a global leadership for setting standards for trade and investment, for research and development, for advances in climate and energy, and, last but not least, in defining and protect human rights and freedoms, too often considered a given thing, that all of us may currently enjoy.
In the meantime, Europeans must ASAP address the factors that currently result in tensions in the markets and create diverging paths for EU economies. This may entail a common budget, common banking supervision and a platform for starting to have common debts at least for most urgent investments. This needs to be of a size that would make it impossible -- by making it credible to the markets -- to reverse course.
A renewed Transatlantic bond, eventually extended to a broader common transatlantic market, jointly with a clear path to a growing political integration of Europe may be the way to credibly dispel all market doubts and restore a path of growth on both sides of the Atlantic. This would no doubt have long term positive global implications reaching far beyond just trade.