High & Low Finance: Euro Avoids Collapse, but Its Future Remains Uncertain

Only a few months ago, it was front-page news. Would the euro collapse? Would most of southern Europe go broke, unable to borrow money at any reasonable rate? Would that bring on a new world recession?

But in this week’s foreign policy debate between President Obama and Mitt Romney, the euro never came up. Europe was mentioned once, but the reference had nothing to do with economics. Mr. Romney did refer to Greece, but only to say we were in danger of going down the same path if we did not change our ways.

To a surprising extent, the perception seems to be that the European situation is under control. That is true if all you worry about is whether bondholders will get paid. It is false if you have a broader perspective.

The focus of the last couple of years on borrowing costs for peripheral members of the euro zone was, in retrospect, unfortunate. It was always clear that Europe, as a whole, had the ability to solve that issue if it wished to do so. The European Central Bank, like the United States Federal Reserve, has the ability to print money, and that is what it finally did.

But the real issue was — and remains — whether the peripheral countries could turn into successful economies while staying in the euro zone. On that issue, progress is painfully slow.

“The actions of the E.C.B. and other policy makers in Europe have generally had the effect of filling large financial gaps in periphery bank and sovereign funding,” wrote Bob Prince of Bridgewater Associates this week, “but have done relatively little to resolve competitive imbalances among these economies.”

Banks are hesitant to lend. On Thursday, the European Central Bank report on loan activity in September showed a record 1.4 percent year-over-year decline in loans outstanding to private sector companies and individuals in the euro zone. “These numbers are rather consistent with the bleak picture painted by business surveys, showing an ongoing contraction of activity,” wrote François Cabau and Phillippe Gudin of Barclays Capital in a note to clients.

If peripheral countries simply had fixed exchange rates, rather than a common currency, they could and almost certainly would have devalued their currencies long before now. That is the normal prescription for countries in financial distress. Couple it with austerity and revivals can be surprisingly rapid, as exports surge and imports plunge.

As it is, the process is sure to be long and painful, but not certain to succeed.

As Europe stumbles and slows, there has been a temptation in the United States to turn our attention elsewhere, to Asia for economic reasons and to the Mideast for political ones. Mr. Romney has tried to add South America to that mix. But neither the Romney nor Obama campaign has wanted to talk much about Europe, a fact that has been noted with a little alarm in Europe.

Richard Lambert, the chancellor of Britain’s Warwick University — and a former editor of The Financial Times as well as a former central banker — was in New York this week trying to convince Americans that they should care, and predicting that the euro will survive.

“The European Union has the capacity to get its affairs into order, if it has the political determination to do so,” he said in a speech at New York University. “This is a crisis about economic imbalances within the euro zone, more than it is about fault lines with the rest of the world.”

That is a point worth remembering. The euro zone as a whole is running smaller budget and current account deficits than is the United States. If it were one country, there might be articles about depressed regions, but not talk of collapse.

But it is not one country. It is taking halting steps in that direction, with a move to unified bank supervision, but political union is not going to happen; Angela Merkel’s name is never going to be on a ballot outside of Germany. Nor is there going to be easy labor mobility around Europe, even though that is supposedly guaranteed now. Cultural and language differences assure that.

Floyd Norris comments on finance and the economy at nytimes.com/economix.