Charlie Rose Talks to Robert Zoellick

You recently said, “European politicians always act a day late and promise one euro too little.” Will that finally change at some point?
The challenge is still whether they can get ahead of the process. There are really two core issues. One is to ensure a strong banking system, and much of that effort in recent weeks has been focused on Spain. If they get sufficient capital in the banking system, that will give additional freedom for the European Central Bank to put money into banks and deal with the risks of uncertainty that could lead to contagion. The second issue is that Spain and Italy have been undertaking some difficult reforms to get control of their budgets—but also structural reforms such as pension and labor market systems. These will take time to show the benefits. And in the meantime, the borrowing costs, particularly of Spain, have been increasing. So Europe needs to come up with some way to ensure that they can continue to roll over their bonds and get financing as the reforms take hold.

In effect, the balance has been that Germany has been correct, in my view, in emphasizing the need for countries to undertake fiscal and structural reforms. On the other hand, these countries need some backstop as they’re undertaking these reforms.

You’ve also said Europe should stand up to Greece’s threats to quit the euro and prepare for the worst.
Coming off these Greek elections, my guess is you’ll see a renegotiation to somewhat ease the terms for Greece, but Greece will have to commit to taking some very difficult steps to be able to earn the ongoing subsidies from the European Union. My point was that you have to be prepared for the consequences if they leave. I think, most likely now, that won’t be the course.

How does Europe get out of this? A friend of mine was wondering if you thought Europe should look at the ideas of Alexander Hamilton.
I’m a great admirer of Alexander Hamilton. That may refer to the idea of supporting Spain and Italy with Eurobonds, sharing the credit of Europe to make sure that Spain and Italy can roll over their bonds. I haven’t favored broad-based Eurobonds because it would undermine market discipline. What Hamilton did when the United States was created was he assumed the debts of the states after the Revolutionary War. But after that one-time assumption, the states had to stand on their own credit, so they’re subject to market discipline.