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 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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  • rate this

    Comment number 20.

    12 RA - a free market has some benefits - but a free market in debt creation is essentially why we are currently in crisis. You can argue that we would be better off if the banks were allowed to go bust and I would agree with that argument, but I feel it would be even better to have prevented the debt engine from pumping up the boom to begin with.

  • rate this

    Comment number 19.

    16 DV I appreciate that 'over production' is a syptom of insufficient demand, but this nomenclature masks the collapse in demand principally as a consequence of switching off / turning down) the global debt pump. I agree that the problem is monetary but Value/labour time are only interchangable in the labour theory of value - (K Marx). Marx was correct about debt instability.

  • rate this

    Comment number 18.

    duvinrouge expands upon his comment #1

    '2012: the collapse of capitalism?'

    on his blog at

    David Malone rips into the fantasy world of bankers at

    What will 2012 bring, same procrastination as 2011 but worse

    (and nobody is leaving the EZ)

  • rate this

    Comment number 17.

    3. "The sovereign debt crisis may also suck the dollar into it's vortex."

    the USD hasn't been worth the paper it's printed on since the 1970s, but it is 'safe' as long as it remains the principle trading currency for oil (hence Iraq, and now Iran).

  • rate this

    Comment number 16.

    #6 feedbackloop

    Insufficient demand & overproduction are two sides of the same coin.
    What is meant by overproduction is the overproduction of commodities relative to the commodity that acts as the universal equivalent - that's money, but not token money, commodity money, i.e. gold.
    Credit/debt enables the overproduction to occur, but credit/token money is divorced from value (labour time).

  • rate this

    Comment number 15.

    Are you not party to Bilderberg Paul? You really should keep up with the big names in the internet world who are now rivalling the banks and select business supremos in influence alongside the political front runners. Check out their views to see where the influence is coming from and what it might mean in relation to steering events.
    The first bank failure will be unexpected and engineered by

  • rate this

    Comment number 14.

    The big economies of Europe suffering, the US and BRICs struggling, protectionism, the rise of extremist political parties, austerity, the end of effective democracy, assorted protests.

    I think you missed the big one... war. Maybe difficult to predict who (Iran?), but very plausible indeed.

    A little more upbeat than realistic Paul, but finishing the year with another great post.

    Happy New Year.

  • rate this

    Comment number 13.

    We shall continue the relentless transition into financial fascism permeating down through every level of what is left of our culture in the west. The biggest failures in a capitalist system were saved and demand subsidy.

  • rate this

    Comment number 12.

    Rather than "2012: the collapse of capitalism" we should hope for "2012: the birth of free market capitalism"

  • rate this

    Comment number 11.

    In the 1st part of 2012 ITA, FRA etc. repay their debts and GRE challenged to qualify for further loans. A shake out will happen and it will all become clear. As I keep repeating, my guess is GRE will leave and ITA, POR, IRE and ESP will be brow beaten enough into austerity that Merkel can tell the GER electorate its OK for ECB of last resort to start. But EU recession has been the cost.

  • rate this

    Comment number 10.

    Solid and sobering analysis rarely seen in main stream media.

    Heck you even exposed the kleptocracy.

    ''because most party machines and political systems are sewn up by elites ''

    I thought such talk was 'off limits' at the BBC, the stock BBC response when someone says something like 'Goldman Sachs rules the world' or 'the elite dont care about the poor' is to look shocked and incredulous.

  • rate this

    Comment number 9.


    Oh no it did not.. you just did not like what it said..please re-instate.

  • rate this

    Comment number 8.

    European politicians will do what they always do - secure and maintain power. They may or may not save the Euro and/or the federal European dream, just so long as they don't lose their place at the trough

    Why would 2012 be any different?

  • Comment number 7.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 6.

    3 Duvin - suspect the problem will be one of insufficient demand (due to significant reduction of rate of increase of debt since credit crunch) rather than overproduction. In fact if the hang over of the crisis was significant overcapacity rather than hugely inflated paper/property assets - things would be a lot easier.

  • rate this

    Comment number 5.

    2012 : Germans will sell more cars to China so me thinks it will be a good year to finally buy that Spanish holiday home :)

  • rate this

    Comment number 4.

    Paul, 2 alternatives; 1. Money creation in EU UK & US, just about prevents collapse of western deficit economies so they can limp through another 20 yrs of repayments or 2. The key deficit economies default and the banks go bust. As 2 is the only stable outcome deficit states should put in place rescue plans, then bring it on. Politicians must read Prof Keen before doing anything else.

  • rate this

    Comment number 3.

    Don't forget the law of value - the printing of token money will not solve the problem of overproduction & the inevitable cannot be postponed forever.

    The sovereign debt crisis may also suck the dollar into it's vortex.

  • rate this

    Comment number 2.

    Paul, ever the optimist! But what of GB? No mention of the continuing failure of Cleggmeron to provide any form of leadership in the EU and dont even mention G20 or anything else. The implications for UK are pretty dire and I will be astonished if we do not lose our AAA rating and have to pay more than Germany to borrow.

  • rate this

    Comment number 1.

    2012: the collapse of capitalism?


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