Eurozone crisis: Troubling year ahead

Nun passing by a beggar in Rome, 10 Dec 12 Beggar in Rome: Italy's debt mountain remains a source of anxiety

Europe's leaders, at the start of the year, would have settled for how 2012 is ending.

The worst of the predictions did not come true. The eurozone has survived intact, but it is still a currency in intensive care.

Recently I asked the German Finance Minister, Wolfgang Schaeuble, how far we were through the crisis and he thought somewhere between 50 and 60%.

Positive signs

Firstly - for those who see the glass half-full.

Europe's leaders demonstrated their absolute commitment to defend the euro and the markets have started to believe them.

The President of the European Central Bank (ECB), Mario Draghi, was the star of the year. By promising to do whatever it takes to defend the currency he brought down the borrowing costs of countries like Spain and Italy. His promise remains untested, but the markets are wary of betting against the bank.

To the often-asked question of what stands behind the euro - the answer is now the ECB.

One of the ratings agencies said "the future of the euro will be decided at the gates of Rome". Under Prime Minister Mario Monti's stewardship, Italy's borrowing costs shrank and reforms are being pushed through.

Europe has committed itself to a banking union - and a European supervisor of the eurozone's big banks. It will involve a large transfer of national authority to a European institution - the ECB. Considering the banks have been at the heart of the crisis, this is a hugely significant step.

Once the banking supervisor is in place, troubled banks will be able to apply for help directly from the permanent bailout fund, the European Stability Mechanism (ESM). It should mark the end of banking problems ending up on government books and forcing up their debts.

Greece did not leave the euro - something many German MPs and officials had suggested as recently as July. The word "Grexit" is no longer heard in the land. Greek Prime Minister Antonis Samaras is judged "serious" and "reliable".

Frau Europe - Angela Merkel - is almost certain to be re-elected as German chancellor in September, although it may make her even more cautious in the short term.

And now the bad news...

Secondly - for those who see the glass as half-empty.

If you look at the real economy, instead of the eurozone's new architecture, the outlook for 2013 is bleak. More countries are heading into recession and unemployment is still rising.

The Greek problem has been rolled over. Almost no one believes that its debts are sustainable. Sooner or later some of its debt will have to be written off. The German taxpayers, at some stage, are likely to be told they will lose money in Greece.

Spain's economy is caught in a cycle of decline. Almost no one expects it to emerge from recession in 2013. It has proved the critics wrong so far, but early next year the question will return - will Spain need a full bailout? That is a problem unresolved. Its social fabric is fraying. Every large-scale demonstration has become more violent.

Italy has entered a period of political instability. Silvio Berlusconi may prove to be less of a player than imagined just a few weeks ago, but there is still likely to be jockeying for power. Mario Monti, the market's favourite, may yet be anointed as the next leader, but the reforms are far less impressive than heralded and Italy is stuck in recession.

Anti-austerity backlash

The British are tiring of the European project and some Europeans are tiring of British exceptionalism. The real political debate about Britain's future in Europe has yet to begin. It will start with David Cameron's "big speech" early in the New Year.

France is the country that makes the Germans queasy. Officials in Berlin believe the first months of Francois Hollande's administration have been a lost opportunity. The new French president has made delivering on his election promises his priority. What French critics want to see is a commitment to modernise France with far-reaching structural reforms.

Across Europe there is growing resistance to austerity. Some European officials have told me we are now entering the most dangerous period - waiting for the reforms to deliver. One senior official said that if growth does not return in two years all bets are off.

Verdict: A better year than Europe expected, but next year is full of challenges. If you accept, as a senior German official does, that more than 50% of economic policy is about psychology, then the mood is more hopeful than had been expected. My tip for 2013 is to spend less time looking at institutional changes and more at the real economy.

The future of the eurozone may well be determined by whether Europe's people have the patience to see if cutting deficits at a time of recession delivers.

Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 29.

    23 Arthur

    I wish you had warned us that your link came from a source called "Testosterone Pit" with articles such as "New Great Dictators are gaining Momentum" - stricly geared towards such people who are now waiting for the Mayan Armageddon.

    Incidentally, German economic strength (*23) long preceded unification which in fact put great strain on it.

  • rate this

    Comment number 28.

    24 David

    "The EU is as dead a duck as the one we're having on Christmas Day"

    My experience as the family cook tells me that the only people who choose a 'dead' duck for their Christmas bird are those who spend the day alone on account of the bird being all bones and no meat.

    Bit like your views on Europe and the euro :)

  • rate this

    Comment number 27.

    If anybody bothers to research it I think they will find that the Southern EZ countries have significantly higher private wealth than Germany. Surprising. This suggests that the Southern EZ countries could ameliorate their sovereign debt problems significantly by encouraging domestic purchase. However private capital is reported as leaving those countries. (Not that I am keen on German strategy)

  • rate this

    Comment number 26.

    "banks have been at the heart of the crisis"

    I still have a feeling that the banks are here merely an instrument, and that the crisis has been caused by somebody who has been misusing this instrument. Maybe an ill-guided politics about what the EU should be? Maybe just the immaturity of the whole idea? In any case, only to settle the banks bilances is not enough for having a good year.

  • rate this

    Comment number 25.

    BBC blogs have some characteristics

    If you give comment then folks who dont like it say give a link to support the comment. Then if the facts supplied dont suit them the facts are ignored or claimed be biased. Not that those wanting to ignore the facts can ever post meaningful opposing facts. Then finally the factual is given a neg rating. Its called denial & its how we got here

    Merry Xmas

  • rate this

    Comment number 24.

    DC must be hoping that the EU house of cards collapses before the next election. He could then avoid having to do anything about it.

    I think he is on to a winner on that count. The EU is as dead a duck as the one we're having on Christmas Day.

  • rate this

    Comment number 23.

    There is the assumption Germany will endlessly prop it all up. Up to a point maybe, its the least damage option at the moment

    But does this sound like a country that can afford it -

    German economic strength sprang originally from ECB interest rates set low to help with German reunification hence EZ bubble

  • rate this

    Comment number 22.

    The Netherlands will see a serious reduction in its economy this coming year. Many companies and ex-pat staff will come to an end of their tax concessions and either reduce their presence there or move away.

    Once the viable economies start to decline the whole house of cards will come down.

  • rate this

    Comment number 21.

    Gavin and company
    Until the leader of the west world and no only the EZ understand that the current economic system as reach the end of is useful life this crises will never end.
    All the Leader at the moment have no power the power is in the hand of Bank and Corporations this must change now or the people eventually will change the system with a Revolution with all the consequence .

  • rate this

    Comment number 20.

    For many in southern Europe the glass is completely empty and many more will be joining them in 2013. Deficit obsession has infected the EU & EZ to such an extent that instead of stopping to review the efficacy of austerity they conform to Einstein's dictum and pile on more. Is no body asking what the damage is going to be to self deflated economies in the long term - e.g. mass youth unemployment

  • rate this

    Comment number 19.

    Gavin's tip is exactly right. It is what should have been done from the beginning of the crisis. However, the Germas have to change tack or leaders for this. P Mason (18th Dec') wrote that Spain was dealt with in a more 'intelligent' way than Greece was. We know where that lack of intelligence was rooted. The German 'intelligence' caused the crisis in the first place, & then made it worse.

  • rate this

    Comment number 18.

    "Eurosocialist Merckel"

    That's a good one. Haha..

  • rate this

    Comment number 17.

    (continued from comment 14) .....53% youth unemployment in under 25's in Spain... this is a social time bomb, I wouldn't like to bet on how long it will take to explode. Europe needs to generate employment AND cut spending... isn't there a point up to which spending can be cut without destroying a country's economy at the same time, or sending 250 to 300 families a day into homelessness?

  • rate this

    Comment number 16.

    The future of the EU over the next five years has little to do with the ECB, Moodys or Monti, or even Merkel.

    Their course is set and nothing will change that.

    The future depends on whether the peoples of Europe are willing to accept that course, given that the EU abhors democracy and has an elite desperate to cling to power.

    The only avenue for protest is the streets and it will be carnage.

  • rate this

    Comment number 15.

    Social unrest eh

    How many times is this misreported as a phenomena

    There are more than one drivers in this area but here is a correlation for the Arab Spring

    As world consumption is ramping up faster than production you can expect more not less problems

  • rate this

    Comment number 14.

    I live in Spain, and believe me the levels of misery are rising fast. The results of the sweeping cuts needed to prop up and finance debt generated by a handful of reckless banks are astounding. Those same banks are not lending money to the people and businesses that need it. 53% unemployment (

  • rate this

    Comment number 13.

    "It is down to the people of Europe"

    Just how many of Europe's people's futures have to be sacrificed before there is the political courage to recognise that far from uniting Europe, they are actually creating division and inequality.

    Will the people be asked? No chance when the politicians and satraps of Brussels fear the answer. Hence ever more intense demonstrations as democracy is evaded.

  • rate this

    Comment number 12.


    'Not entirely true Daley, here in the UK we are experiencing falling unemployment before real growth'

    UK trade off has been full to part time & reduced rate of pay. Underemployment is significant & will not improve until there is growth. Unemployment impact is on youth across EU (50% Greece Spain). More public spending cuts can have only one outcome

    A name doesnt change facts

  • rate this

    Comment number 11.

    Most countries joined the EU because they wanted to ensure a better standard of living and political strength.
    When both these are going, as in Greece, will people still have such a strong desire for a Europe that doesn't live up to expectations.
    It's not just in the UK that euro skepticism is on the rise.

  • rate this

    Comment number 10.

    Regarding Germany, please remember that 80% of the EU budget and 75% of the bailout fund are contributed by all the other EU member states. The people in those countries have no say in German politics. Merkel does not represent them, she represents the Germans, her political stage is wide, but the decisions she makes are influenced mainly by what Germans think and how they may vote in the future.


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