By Matt Vella
October 31, 2012

By Kurt Wagner, reporter

FORTUNE — It was three years ago this month that Greek Prime Minister George Papandreou announced the budget deficit that marked the start of Europe’s fiscal meltdown. In the years that followed, Eurozone members saw their banking systems brought to their knees and their citizens take to the streets in riots and protests. The result: unstable markets and large-scale economic uncertainty with global ramifications.

Fortune caught up with former President of the World Bank, Robert Zoellick, to discuss the crisis in Europe. Zoellick, who left his post in June after serving a five-year appointment, provided record levels of economic assistance to developing countries during his presidency — more than $247 billion. The World Bank’s mission is to help reduce global poverty. The following is a lightly edited transcript.

FORTUNE: Some people have referred to the situation in Europe as not just a currency crisis, but also a political crisis. What are your thoughts about that?

Zoellick: Well I think Europe faces a combination of economic and political issues. Europeans understandably look at this within the context of how they will achieve a deeper integration within the European system. Ultimately democratic politicians need to win the support of their voters. And so one of the issues will be whether the European leaders will be able to explain the steps for the near-term and the long-term [integration] in ways that build public support. So that’s why this is not only a question of politics and economics but in some ways, it’s a question about Europe’s role in the world. So when you listen to the debates about foreign policy during the [Presidential] campaign, what I’ve been struck by is you don’t see a discussion of the Eurozone because it’s seen as economics. But at the same time it’s the fundamental future of America’s closest ally in the world.

Greece’s largest company, Coca Cola Hellenic, announced it would pull out of the country a few weeks back. Can you put the severity of this decision into perspective?

Well Greece is about 2 percent of the European Union’s GDP, so on the one hand it would be a manageable problem if the Europeans, including the Greeks, come together with an approach. The Europeans however have a stake in Greece that’s larger than Greece’s 2 percent of GDP in that if Greece left the Eurozone, this would create additional risk in the minds of financial markets that others could leave the Eurozone. And that takes away some of the benefits of a common currency. And in my view, the European banking system is not yet prepared for that. So when you ask about the withdrawal of a company, that’s obviously a concern that they feel that the overall benefits in terms of sales and marketing are no longer outweighed by the risks of operating in Greece. And that’s not a healthy sign.

The Eurozone failed to integrate the banking systems when the Euro was created. Is integration still possible, and if so, is it a good idea?

Europe is trying to discuss overall common bank supervision. That is partly related to the fact that if the European Central Bank is going to provide support for banks they want to make sure they’ve got a common supervisory system. One of the dangers of banking systems over the century is that if people panic, if they are worried about the fundamental strength of banks, then they just pull their money out. And so economists will call it a liquidity crisis. So I think if you are going to create a cohesive financial system, that is a constructive step.

Do you envision a breakup of the Eurozone?

I think it’s most likely that Europe muddles through. Mario Draghi, [President] of the European Central Bank, has outlined the pathway and countries have to take the actions. But what I have identified is that in the real world of politics and economics, there’s often a slip between the plan and the execution. So I would identify some potential risks to the execution of policy. The first one is if Greece leaves the Eurozone, in part because of political pressures within the Greek public, I don’t think the European banking system is ready for the shock that that creates for the euro. I’m not forecasting that Greece would leave, but remember we are talking about a problem that’s not a question of a month or two; it’s going to be a question of years. A second risk, and the one that’s bigger in terms of dollar value, is Italy and Spain dwarf the others in terms of size. They both made reforms, but will Europe follow through on the financing mechanism to be able to help them finance at reasonable rates and will they keep making the reforms? Right now [Italian Prime Minister] Mario Monti has done a very good job, but who’s going to be prime minister next year in Italy and will they maintain reforms? In my experience, part of the challenge of being a policy maker is anticipating risks and trying to manage them. So best guess – muddle through.

Do you see one country in particular as being a linchpin to finding a solution?

It’s a story of Europe so it can’t be one country. In other words, the Spanish and the Italians and the Greeks need to make their reforms, and ultimately Germany is the potential paymaster. But even if Germany was willing to do everything, if the others don’t make their reforms it won’t work. The whole storyline in this narrative is the fact that it’s how you create a more unified, integrated Europe out of the nation states.


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