We're in the euro now

The eurozone teeters on the brink of financial catastrophe, and the U.S. economy — and the 2012 election — may hang in the balance

At NYU's annual conference on American politics at Villa La Pietra in Florence, Italy, earlier this month, the conversation veered off the usual course.

More than just the contours of America's electoral landscape were discussed at this Florentine villa that once belonged to Francesco Sassetti, the Medici partner in what was Renaissance Europe's dominant bank. The debate also turned to European finances, and a subject that until now would have been regarded as an inconceivable factor in our presidential election: The strength and stability of the euro and the state of the eurozone, the 17 nations that have adopted a common continental currency.

When Gordon Brown was Britain's Chancellor of the Exchequer, he adamantly and successfully insisted that his country should not trade the pound for the euro. The United States, of course, was never to be part of the experiment. But stock markets everywhere are now sending bright red downward signals that our economy, Britain's, and the rest of the world's are hanging, breathless and largely powerless, on the fate of Greek finance and the interconnected crises in undercapitalized banks and overleveraged sovereign debt across Europe. Hanging in the balance, too, is U.S. politics in 2012 — because failure to contain the dangers over there could trigger a steep new downturn there, here, and globally.

Treasury Secretary Tim Geithner has pressed the Europeans to move decisively. They've all but dismissed him.

The euro was a monetary Rube Goldberg invention — a currency union of many combined with the fiscal independence of each, tempered in theory but not in fact by largely unenforceable guidelines on deficits as a percentage of national income. And if the guidelines were rigidly enforced, they would put member states in inflexible and inadequate straitjackets in times of economic contraction. That's what's happening to Greece, as eurozone-imposed cuts shrink its economy, and the resulting fall in revenues dooms Athens to chase the tail of deficit reduction. In Britain, where the austerity of cutting too fast, too soon is self-imposed, the growth which was coming back has collapsed since the Conservative takeover in 2010 — and so the deficit is higher than it's supposed to be.

Such policies, compounded by parochial politics, have delayed and may destroy a necessarily common effort to rise to an undeniably urgent challenge. That effort could take the form of eurobonds — with the strong, especially Germany, rescuing the weak. Or other mechanisms could create a backstop of 2 or 3 trillion euros — far more than the present total of 440 billion. This could let the European Central Bank buy sovereign debt from troubled countries, stanch the speculation and fears of default, and recapitalize precarious banking systems; if the sum were that big, the impact would be so big and immediate that a large portion of the money would never have to be spent.

This would be the economic equivalent of Colin Powell's military doctrine of overwhelming force. Instead, with German Chancellor Angela Merkel in the driver's seat and her eyes firmly fixed on local politics in places like Westphalia — not to mention the Teutonic dogma of unforgiving thrift — Europe is reacting with dribs, drabs, and continuing disagreements. Merkel and French President Nicolas Sarkozy can't even settle on the details of incremental action. The European Union summit scheduled for this weekend may be postponed. CNBC's Bob Pisani recounts the conclusion of one trader: "They'll get into a room, one will say, 'We ain't paying,' the other will say, 'Fine, don't pay. We're heading for Armageddon.'"