We're in the euro now

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.

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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.'"

The Germans fiercely resist paying — and Merkel, focused on her re-election in 2013, clearly worries about a popular backlash if she decides that Europe's dominant economy has to do its part. Germany wants the benefits of the euro, but not the responsibility. You have to wonder how Merkel will fare in 2013 if in the meantime the shortsighted dithering and half measures result in a recession that envelops her own economy.

Even the half measures have proved hard because the eurozone functions like the Articles of Confederation did prior to the U.S. Constitution: Changes require the unanimous consent of member states. Thus, a recent modification to the original, now plainly insufficient, bailout plan was nearly scuttled by political maneuvering in Slovakia, which accounts for far less than 1 percent of European GDP.

The Obama administration understands what's at stake here. Treasury Secretary Tim Geithner has pressed the Europeans to move decisively. They've all but dismissed him; as a European consultant to major corporations and investors told me, the continent's leaders are in no mood to take advice from the Americans who "caused" the collapse of 2008. (Never mind that a different set of Americans was in charge then.)

What's happening in Europe isn't sensible; but as Republicans are showing here, economics can be an inexact nonscience — a kind of simplistic sloganeering fueled by stubborn ideology and partisan calculation. Indeed, the European mess is hardly mentioned in GOP campaign or the candidate debates. Monetary policy in general, with its complications previously consigned to its own cadre of "wise men," has now entered the popular dialogue in the form of cartoonish caricatures like Bernanke-bashing, the Rick Perry and Ron Paul attacks on the chairman of the Federal Reserve for trying to sustain the recovery.

Events may press Europe's hapless leaders finally to do what they should — but for the moment, that outcome still appears to be more hope than prospect. And beyond the euro crisis, where is the will to create new transnational rules and safety nets for globalized finance?

Without those, in the face of recurring economic turmoil, a transnational demagoguery will gain momentum, calling for a retreat into national shells of protectionism and economic self-absorption. It's a bad idea, a summons to a false nostalgia, a time that will never return; it would stagnate economies and depress standards of living. But it could impress disillusioned electorates. One presidential candidate in France attracted a remarkable share of the vote in the Socialist Party primary with his appeal to de-globalize. That could be the story of the decade — if presidents, prime ministers, and chancellors prove unequal to the pressing realities, in Europe and elsewhere.

Long after the political battlefields clear, history renders its judgments. And through history's lens, leaders tend to be most remembered not for all they did, but for one defining, indelible moment. In our time, for George W. Bush and British Prime Minister Tony Blair, it will be the disaster of Iraq. For Bill Clinton, it could have been, it almost was, peace in the Middle East. For Gordon Brown, who succeeded Blair as prime minister, it will be his commanding role in preventing the financial upheaval of 2008 from descending into collapse and depression.

At this turning point, Merkel and the Europeans are determining their place in history, the condition of their economies and ours, and maybe the 2012 outcome in the United States. Watching this in Florence, I thought of Francesco Sassetti, distracted and temporizing, as Medici banks were driven into the ground. Will the decision-makers of the eurozone be different — and better?

They not only have a continent in their hands, but the world and America too — because like it or not, the U.S. is in the euro now.