A year ago, many people seriously doubted whether the euro would still exist by now. On the threshold of 2013, the debate is more about how long it will take for the euro zone economy to recover and what must be changed to avoid future crises.
Europe still has plenty to worry about. Economic output is shrinking in nine of the 17 nations that use the euro. European banks remain weak, and many have yet to confront their problems decisively.
Many businesses in Spain, Italy and other distressed countries cannot obtain credit, hampering a recovery.
On top of that, with national elections coming in Italy in February and Germany in September, leaders there may be more focused on the narrow concerns of their voters than the cause of European unity.
“At the moment the crisis seems to have calmed down somewhat,” Jens Weidmann, president of the Bundesbank, the German central bank, said in an interview with the Frankfurter Allgemeine newspaper published on Sunday. “But the underlying causes have by no means been eliminated.”
But consider some of the doomsday situations that did not occur in 2012. Greece did not leave the euro zone or set off a financial disaster like the one sparked by the collapse of Lehman Brothers. Spanish and Italian bond yields, rather than succumbing to contagion from Greece, retreated from levels that had threatened their governments with bankruptcy. And nowhere did populist, anti-euro political parties gain the upper hand.
All of these things could still happen, but the probability of catastrophe has fallen substantially because of a fundamental change in the way that European leaders are dealing with the crisis.
Under its president, Mario Draghi, the European Central Bank has promised to buy the bonds of countries like Spain, if needed, to control their borrowing costs.
That vow, which cooled the crisis fever of late summer, bought time for elected officials to begin creating the superstructure needed to make the euro more credible, including a permanent fund for rescuing stricken member countries and a unified system for overseeing banks.
“In 2012, the euro area leaders finally got the diagnosis right,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “It wasn’t about Greek debt or Irish banks. It was about some very fundamental design flaws that needed to be fixed. That’s what markets were looking for.”
Even though European political leaders seem to argue endlessly, they have made enough progress to keep speculators at bay. Investors surveyed by UBS recently ranked the chances of a breakup of the euro zone well behind the potential danger from a combination of spending cuts and tax increases scheduled to take effect in the United States next month or a hard landing by the Chinese economy.
“There is more of a perception that nobody is better off if this thing breaks up,” said Richard Barwell, senior European economist at Royal Bank of Scotland.
The question in 2013 will be whether a fragile calm in Europe holds long enough for economic growth to resume, for banks to rebuild their balance sheets and for leaders to make progress creating a more durable currency union.
Here are some of the main things to watch:
ECONOMIC PERFORMANCE The euro crisis, arguably, will be over the day that all of the stricken countries are generating economic growth. Ireland, one of the first countries to get into debt trouble back in 2008, might already have turned the corner. Its gross domestic product grew 0.2 percent in the third quarter from the period a year earlier.
Spain, Italy and Portugal are still deep in recession, and Greece is in a de facto depression. But there are some signs of progress in one crucial measure: trade balances. All of the distressed countries have increased exports this year and reduced trade deficits. That is a sign their products have become more competitive on world markets.
Article source: http://www.nytimes.com/2012/12/31/business/global/in-europe-debate-slowly-shifts-to-speed-of-a-recovery.html?partner=rss&emc=rss
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