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.

Euro Watch: Europe Forecast Uncertain as Business and Consumer Confidence Fall Again

The European Commission reported that its economic sentiment indicator for the 17 European Union members that use the euro fell by 1.1 points, to 85.0, the seventh consecutive month of decline.

For the 27-member European Union, confidence fell by 0.9 points in September, to 86.1. An indicator of more than 100 shows more confidence than not about the economy in five sectors surveyed.

The commission attributed the weakening to declining confidence in the services, retailing, industrial and consumer sectors. It cited increased optimism in the fifth sector, construction, as a promising sign.

The data is “another warning that the euro zone economy is sinking further into recession,” Jonathan Loynes, chief European economist at Capital Economics, wrote in an analysis, adding that the results dashed hopes that the European Central Bank’s pledge on Sept. 6 “to take more decisive policy action might have improved sentiment towards the broader economy.”

Mr. Loynes said the confidence results were consistent with an annual contraction in the euro zone economy of about 2.5 percent.

Figures from the core euro zone economies were mixed.

In Germany, the Federal Labor Agency said the number of unemployed rose for the sixth consecutive month. Although the seasonally adjusted unemployment rate held steady at 6.8 percent in September, there were 9,000 more people out of work than in August.

As a result of structural changes in the early 2000s, the German labor market has remained resilient during the crisis in much of Europe. But the Labor Agency predicted the German job market would cool in the rest of 2012 as growth slowed and the impact of the euro zone crisis began to take a toll.

Germany’s labor market has been one of the main drivers of its growth this year, Carsten Brzeski, an economist with ING in Brussels, wrote, and the data Thursday suggests that the slowdown of recent months “seems to have come to at least a temporary halt.” Nonetheless, he added, hiring is losing momentum and manufacturers will probably begin to shed jobs soon. He estimated that the German unemployment rate would return to 7 percent by the end of 2012.

On Wednesday, the Labor Ministry in France said the number of jobless there rose for a 16th consecutive month in August to reach more than three million, its highest level since June 1999.

On Friday, President François Hollande’s government will present its proposed 2013 budget. The finance minister, Pierre Moscovici, has said that the government will cut the deficit to 3 percent of gross domestic product, in line with European rules, from the 4.5 percent expected this year.

Data from the European Central Bank showed that growth in M3 money supply, a measure of lending activity, decelerated significantly in the euro zone in August, to 2.9 percent, from 3.6 percent in July. That was well below market expectations, according to Michael Schubert, an economist at Commerzbank in Frankfurt.

More important, Mr. Schubert wrote in a note, was the decline in lending to nonfinancial companies, which dropped 0.8 percent from a year earlier, while loans to households rose 0.2 percent.

“The E.C.B. probably sees fragmented financial markets as one reason for the low loan momentum,” he wrote, and it therefore believes the new bond purchase program announced by the bank’s president, Mario Draghi, is justified.

Mr. Draghi said on Sept. 6 that the European Central Bank was prepared to buy the bonds of embattled euro zone countries in “unlimited” quantities to quell the crisis, which has driven some members’ financing costs to levels seen as unsustainable.

Melissa Eddy contributed reporting from Berlin.