The sovereign debt crisis in Europe has all but disappeared in the consciousness of Americans. A few months ago, it dominated headlines. In the third and last presidential debate, the euro was never mentioned.
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The perception seems to be that Europe has gotten the situation under control. If the issue is whether bondholders will get paid, that would be a correct assumption. If investors take a broader perspective, it is delusional.
Europe always had the ability to solve the problem if it wanted to. The European Central Bank (ECB) could have modeled after the Federal Reserve and chosen to print money—a move it eventually made.
But the resistance to doing just that masked the real issue of whether peripheral countries’ economies could become successful if they remained in the euro.
The actions taken so far have filled financial gaps in periphery banks and sovereign funding but have so far failed to address competitive imbalances among these economies.
Banks are reluctant to lend. The ECB reported that September lending activity declined 1.4% year-over-year in loans to private sector companies and to individuals.
If peripheral countries had fixed exchange rates instead of a common currency, they likely would have devalued their currencies long ago.
Within the euro, the process of return to solvency promises to be slow but not necessarily successful. It is a crisis about economic imbalances
within the Eurozone, not between Europe and the rest of the world.
Unlike the US does between states, Europe does not have automatic transfer payments. Its various central bank programs essentially transfer payments from rich countries to poor ones.
The conclusion is that, in the short term, the euro is in no danger of collapsing. Whether it is sustainable over the long term is still in question.