(Bloomberg News) Pacific Investment Management Co.'s Mohamed El-Erian said the stakes have been "raised hugely" for the euro-area summit beginning today as the focus shifts from stabilizing periphery nations to the core of the region.
"This is big, and we will look back on this as a big moment in history," El-Erian, the chief executive officer of the world's largest manager of bond funds, said during an interview on Bloomberg Television's "In the Loop" with Betty Liu. "If you want to change the game tomorrow, you need to come up with some important and credible decisions."
European Central Bank President Mario Draghi cut interest rates and offered banks unlimited cash for three years today while steering clear of any signal the ECB will buy more bonds to stem the region's debt crisis. Hours before European leaders meet in Brussels, Draghi kept the onus on them to solve the two- year crisis by repeating his call for a "fiscal compact" and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.
"The first decision is a vision of what the euro zone is going to look like in three years time," El-Erian said from Pimco's headquarters in Newport Beach, California. "Is it going to be the same size, or is it going to be smaller and less imperfect?"
German Chancellor Angela Merkel and French President Nicolas Sarkozy presented a plan this week to rewrite the EU's governing treaty to allow tighter economic cooperation, raising speculation that the composition of the monetary union may have to be alerted.
Lawmakers need to provide a "bridge," such as a signal that the ECB will go "all in" to support the union, as governments implement changes, as well as addressing concerns of slowing economic growth even as they seek to reduce debts and deficits, El-Erian said.
"If we fall short, the downside risk to the global economy would increase even more," El-Erian said. "The fragility of the banking system in Europe will increase, and if we fall short, the debt cost of the periphery will increase. So there's a lot at stake."
Draghi's comments roiled markets, with stocks and the euro rising on the bank-lending measures before falling after he damped speculation that more bond purchases are imminent. The euro sank more than 1 percent and traded at $1.3326 at 12:12 p.m. in New York.
Investors should prepare for a range of outcomes to the crisis, from governments succeeding in keeping the euro zone in existing form, to a smaller currency union or a "total fragmentation of the euro zone with the 17 countries introducing their own currency," El-Erian said.
"That discussion about different scenarios is something everyone should be having because there is a probability for each of these," he said.