Three big questions for the eurozone

 

In a normal year predicting economics is like predicting the outcome of a card game: there are too many variables and the only certainty being that the suckers will lose and the stealthily self-interested will win.

In 2012 however, the shape of the crisis is heavily predetermined: there are a series of crucial stages the eurocrisis has to go through and the way they're resolved will affect everything else.

Starting from where we are now, there are three big questions:

  • Is the ECB's unofficial money printing operation - a massively expanded bond-buying venture combined with unlimited provision of cash by global central banks - going to be enough to prevent a second credit crunch, centred on Italy?
  • Does Greece spiral finally into default, social crisis and chaos, raising the prospect of the near-dictatorial economic policies needed if you have to exit the Euro?
  • Do the French banks take so many losses on the sovereign debt of southern Europe that they have to be part nationalised, thus removing the country's AAA credit rating and the all-important financial parity between Germany and France that lies at the heart of the European system?

Right now my answers to these questions would be yes, yes and yes.

That is: yes, a liquidity splurge is going to be enough to prevent a credit crunch - though it will later have to be acknowledged as a massive and unconstitutional policy shift, forcing the ECB to become lender of last resort.

And yes, Greece will default. Its 50% haircut is proving hard to make stick; its coalition government is unstable and cannot collect enough tax; its people are increasingly destitute; its rich elite has, functionally, scarpered in anticipation of the pain to come. But given that the majority of Greeks still don't want to leave the Euro, and the eurozone leaders won't force them out, we will end up with a defaulted country using the Euro on sufferance, which is another de-facto step towards fiscal union.

And again yes: France will lose its AAA credit rating - causing problems for President Sarkozy and huge soul-searching in Germany, where those close to Chancellor Angela Merkel believe Franco-German apparent equality of status is crucial to selling any future fiscal union.

French problems

This, it will be seen, is not all bad. What's bad is that the indecision that scarred the months between June and December has already done enough damage to cause economists to predict a sharp recession focused around the first and second quarter of 2012 in the eurozone. Minus 1.5% economic growth for the year in the zone, says Standard Chartered's Gerard Lyons, and it's not the most pessimistic prediction I've seen.

The most likely outcome in pure economic terms is a moderately bad fiscal crisis, a survivable sovereign debt event and a sharp growth downturn, all in the first half of the year.

This then creates political problems that feed back into the economic loop. First, the frontrunner in the French presidential election, Francois Hollande, says he'll renegotiate the Treaty agreed in December. If he does, the prospect of a socialist victory in April will cause instability in the bond markets.

Greek trouble

Second, there is Greece. New Democracy are looking likely to win - with 30% in the last three December opinion polls. Their parliamentary majority will be sealed by the Greek "augmented proportionality rule" which hands extra MPs to the largest party. But then the opposition will be the far left. Pasok is tanking at the polls - on 18%. But the combined vote of the Communists, the United Left and the Democratic Left is hovering around 28-29% in each of the last three polls. Of course these parties have severe ideological differences with each other, and have occasionally clashed in demonstrations - but Greek politics is polarising at the same time as its professional politicians are running out of answers. It is hard not to predict a social explosion in Greece. Should it be forced to exit the eurozone, then the exit plans I've seen do not look pretty. The one outlined by SOAS professor Costas Lapavitsas involves bank closures, current account freezes, import and capital controls and probably food rationing.

Italian instability

Then there is Italian politics. While the Eurocratic elite congratulate themselves on getting rid of a pantomime dame as prime minister, on the ground the technocratic government of Mario Monti is not that popular. Since there is no election scheduled, it remains to be seen how long he will be tolerated by the centre right majority in the Italian parliament, and the middle classes who have put them there.

Of the two political factors in Euro instability, the Greek and French elections come closely together: in mid and late April. By then a third political factor - renewed fighting in Washington over the 2013 US budget will be under way.

All this makes me think the first six months of 2012 will be marked by a containable fiscal and financial crisis, a double dip recession in Europe and some severe political shenanigans which bring non-mainstream politicians to the point where they are the official opposition, certainly in Greece and maybe also in France, where Marine Le Pen, of the National Front, could stand to gain from any anti-Sarkozy backlash.

Return of protectionism

Because of this, and the generally predicted slowdown in Asia and the BRICs [Brazil, Russia, India, China] as well as Europe, I think the other big thing we'll see in 2012 is a return to protectionism.

We already saw in December David Cameron walk away from a new Euro treaty on the grounds of defending Britain's national interest. On the same grounds Canada has walked away from Kyoto, and the Durban deal on Kyoto targets looks very meagre and subject to national flounce-outs.

China and America have continued their sparring over a tyres to poultry to luxury cars row at the World Trade Organization, with each imposing retaliatory taxes on the other; meanwhile Brazil's relationship with the USA is already couched in terms of trade war.

Economic imbalances

In 2012 the tendencies towards competitive exit routes from the crisis will increase, and they will do so along routes that are not obvious: direct trade battles may not be so important as battles over fishing rights, quotas, environmental damage and climate change. Access for tar-sand produced oil to Europe is worth watching.

By the time we get to the G20 summit in Los Cabos, Mexico, in June, we will be looking for global leadership: a global programme to stimulate growth - and to smooth out the relentlessly expanding imbalances in the world economy - and some calming words against trade war and currency manipulation. The worst thing would be is if we get another Cannes-style fiasco and the prospects do not look good.

In an election year President Obama is going to be domestically focused; there may be a new French president; the German Chancellor will be in pre-election mode herself by then and almost everybody else has not enough traction to make a difference.

I think the mid-year will be a clear inflection point. If the worst of the eurocrisis is over; if Greece is sterilised, and the ECB gets real about its role as a central bank; if America's budget cuts go onto autopilot and a non-extreme candidate is picked by the Republican party to run against Obama, then we may actually be entering the final 18 months of the post-Lehman crisis. The bottom of the US housing market is probably already behind us, and it will demonstrably pick up in 2012.

Exporting trouble

But beyond that it's hard to predict, because so many of the exit strategies from the crisis depend on exporting trouble to your neighbour or your rival. What's sure is that the politicians and central bankers have immense power of agency to make things go either right or wrong.

What's also clear is how much pressure they do actually feel from electorates - not directly, because most party machines and political systems are sewn up by elites - but indirectly through the various protest movements that have sprung up, and through social media and mass media participation in general. When I was at Cannes in November, what impressed me was the contrast between how sequestered the world leaders are from reality - the nearest shops are always Gucci and Swarovski themed - but how aware of the minutiae of what the occupy movement has just done, or what Ron Paul or Paul Krugman has just said.

So in addition to predicting a continued social upheaval in 2012 I will predict the further rise - not yet to power but to the edges of power - of the conviction politician. Ron Paul I think is still worth watching for the Republican presidential race; meanwhile Alexis Tsipras, leader of the Greek leftist coalition Syriza is also one to watch. And on the basis that even Churchill came back from abject catastrophe more than once, do not consign Silvio Berlusconi yet to the political waxworks.

Paul Mason joins Owen Bennett-Jones and a roundtable of BBC Correspondents tonight on BBC Radio Four at 2000 GMT

 
Paul Mason, Economics editor, Newsnight Article written by Paul Mason Paul Mason Former economics editor, Newsnight

End of an era

After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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