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| In Europe, Focus Begins to Shift to the Speed of a Nascent Recovery | |
| (35 minutes later) | |
| SAY what you will about the euro zone’s quarreling policy makers. They can claim at least one achievement during 2012: their common currency still has a heartbeat. | SAY what you will about the euro zone’s quarreling policy makers. They can claim at least one achievement during 2012: their common currency still has a heartbeat. |
| 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. | 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. | 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. | 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. | 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.” | “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. | 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. | 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. | 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. | 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.” | “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. | 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. | “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. | 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: | 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. | 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. | 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. |
| The gains in competitiveness have come at the expense of working people, who had to accept lower wages. But the worst may be over. “The hardest part of that adjustment has probably come to pass,” economists at UBS said in a recent note to investors. | The gains in competitiveness have come at the expense of working people, who had to accept lower wages. But the worst may be over. “The hardest part of that adjustment has probably come to pass,” economists at UBS said in a recent note to investors. |
| Banks and European financial institutions still face an array of problems, including bad real estate loans in Spain and overexposure to the shipping industry in Germany. And despite a generous supply of cash from the European Central Bank, credit is scarce for businesses in Southern Europe. | Banks and European financial institutions still face an array of problems, including bad real estate loans in Spain and overexposure to the shipping industry in Germany. And despite a generous supply of cash from the European Central Bank, credit is scarce for businesses in Southern Europe. |
| Europe probably cannot recover until the banking system is fixed, but that is taking a long time. In December, European leaders agreed to put the central bank in charge of supervising the 100 or so biggest banks in the euro zone, while also giving it the power to intervene in other banks if it sees fit. The central bank is expected to push banks harder to deal with problem loans and rebuild their cash reserves. | Europe probably cannot recover until the banking system is fixed, but that is taking a long time. In December, European leaders agreed to put the central bank in charge of supervising the 100 or so biggest banks in the euro zone, while also giving it the power to intervene in other banks if it sees fit. The central bank is expected to push banks harder to deal with problem loans and rebuild their cash reserves. |
| But the central bank will not fully assume its regulatory duties until the beginning of 2014. And European leaders have not resolved another big problem: how to close down insolvent banks in a way that does not stick taxpayers with the bill. They also have been unable to agree on a deposit insurance plan for the euro zone that would protect consumers and help prevent bank runs. | But the central bank will not fully assume its regulatory duties until the beginning of 2014. And European leaders have not resolved another big problem: how to close down insolvent banks in a way that does not stick taxpayers with the bill. They also have been unable to agree on a deposit insurance plan for the euro zone that would protect consumers and help prevent bank runs. |
| One result is that confidence in banks remains low, making it hard for them to raise money they can lend to their clients. According to the European Central Bank, almost all big banks in Europe are valued by the stock market at substantially less than the book value of their loans outstanding and other assets. | One result is that confidence in banks remains low, making it hard for them to raise money they can lend to their clients. According to the European Central Bank, almost all big banks in Europe are valued by the stock market at substantially less than the book value of their loans outstanding and other assets. |
| “It is really a very negative judgment by the stock market,” Vítor Constâncio, the bank’s vice president, said this month. | “It is really a very negative judgment by the stock market,” Vítor Constâncio, the bank’s vice president, said this month. |
| POLITICS National elections in Italy in February and Germany in September could make it harder for leaders to agree to measures that could strengthen the euro zone but might be unpopular with voters, like stricter oversight of government spending. | POLITICS National elections in Italy in February and Germany in September could make it harder for leaders to agree to measures that could strengthen the euro zone but might be unpopular with voters, like stricter oversight of government spending. |
| Mario Monti, the caretaker prime minister of Italy, said in recent days that he would not campaign for the top post but would agree to stay on if centrist parties asked him to. Investors and many European leaders would probably be happy to see Mr. Monti stay. | Mario Monti, the caretaker prime minister of Italy, said in recent days that he would not campaign for the top post but would agree to stay on if centrist parties asked him to. Investors and many European leaders would probably be happy to see Mr. Monti stay. |
| He has helped Italy regain credibility abroad, lowering its borrowing costs, and he has taken steps to overhaul the economy. There is palpable nervousness about an attempted comeback by Silvio Berlusconi, a mercurial former prime minister, even if he is unlikely to regain his old job. | He has helped Italy regain credibility abroad, lowering its borrowing costs, and he has taken steps to overhaul the economy. There is palpable nervousness about an attempted comeback by Silvio Berlusconi, a mercurial former prime minister, even if he is unlikely to regain his old job. |
| In Germany, Chancellor Angela Merkel is very popular and the opposition is weak. But German voters are also grumpy about having to pay for bailouts of Greece and other countries. Until the election is behind her, Ms. Merkel may be reluctant to contribute more German money to hold together the euro. | In Germany, Chancellor Angela Merkel is very popular and the opposition is weak. But German voters are also grumpy about having to pay for bailouts of Greece and other countries. Until the election is behind her, Ms. Merkel may be reluctant to contribute more German money to hold together the euro. |
| DEBT Greece still owes more money than it can repay, economists say. But the danger to financial markets of a default has receded because the debt is effectively out of circulation. | DEBT Greece still owes more money than it can repay, economists say. But the danger to financial markets of a default has receded because the debt is effectively out of circulation. |
| Less than 20 percent of outstanding Greek bonds is in private hands, according to Goldman Sachs. The rest belongs to other euro zone governments or public sector institutions like the European Central Bank or International Monetary Fund. | Less than 20 percent of outstanding Greek bonds is in private hands, according to Goldman Sachs. The rest belongs to other euro zone governments or public sector institutions like the European Central Bank or International Monetary Fund. |
| “Since official-sector holdings are now predominant, it is political considerations — rather than economic and financial dynamics — that will determine whether Greece remains within the euro area,” Goldman Sachs analysts wrote in a note to clients. In other words, Greece will stay in the euro zone as long as other members want it to. | “Since official-sector holdings are now predominant, it is political considerations — rather than economic and financial dynamics — that will determine whether Greece remains within the euro area,” Goldman Sachs analysts wrote in a note to clients. In other words, Greece will stay in the euro zone as long as other members want it to. |
| Spain also remains a concern because of the financial burden of rescuing its ailing banks. Political leaders and investors will be watching closely in coming months to see if Spain formally asks for support from the euro zone rescue fund, the European Stability Mechanism. | Spain also remains a concern because of the financial burden of rescuing its ailing banks. Political leaders and investors will be watching closely in coming months to see if Spain formally asks for support from the euro zone rescue fund, the European Stability Mechanism. |
| If so, Spain would also qualify for support from the central bank, which would buy Spanish bonds if needed to help control the country’s borrowing costs. | If so, Spain would also qualify for support from the central bank, which would buy Spanish bonds if needed to help control the country’s borrowing costs. |
| FRANCE Tensions may be easing in much of the euro zone, but they are growing in France. The economy is at a standstill, and the government is perceived as hostile to business. That has many people worried. | FRANCE Tensions may be easing in much of the euro zone, but they are growing in France. The economy is at a standstill, and the government is perceived as hostile to business. That has many people worried. |
| “The real fundamental question is whether France will be able to restructure and make France strong and competitive again,” Günter Verheugen, a former member of the European Commission, said at a conference in Warsaw this month. | “The real fundamental question is whether France will be able to restructure and make France strong and competitive again,” Günter Verheugen, a former member of the European Commission, said at a conference in Warsaw this month. |
| Still, Mr. Kirkegaard of the Peterson Institute remains optimistic that the euro currency union will survive. Despite all the complaining about the cost, Europeans recoil at the alternative, Mr. Kirkegaard wrote recently. | Still, Mr. Kirkegaard of the Peterson Institute remains optimistic that the euro currency union will survive. Despite all the complaining about the cost, Europeans recoil at the alternative, Mr. Kirkegaard wrote recently. |
| “Most voters,” he said, “will not take a chance on a new drachma, lira or escudos.” | “Most voters,” he said, “will not take a chance on a new drachma, lira or escudos.” |