Europe’s banking system is on the verge of melting down, as the ECB and the IMF struggle to contain the crisis that began in Greece and has spread throughout most of the continent and the world. Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, has been a forceful critic of those institutions. Eichengreen, whose most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar, has argued that the policymakers have been in denial about the depth of the financial and economic crisis. Here Eichengreen – himself a former senior policy advisor to the IMF – explains why he believes Europe is once again at the precipice and how to pull it back from the brink. Here are highlights of his conversation with Institutional Investor contributing writer Steve Rosenbush.

Institutional Investor: How critical is the debt crisis in Europe and is world political and economic leadership managing it properly?

David Eichengreen: As I put it in a recent article, Europe is at the precipice. The survival of the euro and the European Union itself are at stake. So far, the policy response has been ineffective. (“Ineffective” is the most polite description I can think of.) To address the crisis, three things must be done, immediately. Most important is that European banks be recapitalized. There is absolutely no doubt that Europe has a bank funding problem. So far, the euro area has preferred to deny the existence of that problem.

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