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 Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 69.

    The eurozone is heading for a reasonably happy Christmas but the New Year will be a different matter. Last years 'whirlpool of debt' which, moved at high speed in an endless circle of desperation, will dramatically slow down and surely disappear down the plug hole forever.

  • rate this

    Comment number 68.

    @52.Angela s Little Helper
    The EU is a socialist state, any real-market attributes have been a by-product. The intent has always been to build a single European State, with or without the support of the people.

  • rate this

    Comment number 67.

    39. margaret howard

    "You can't force anyone to buy goods. Germany has for decades been renowned for its high quality products..

    There were no shenanigans involved and it is an insult to the energy, inventiveness and hard work of the German people"

    Economic advantage is economic advantage simple as

    EZ was a closed system so imbalance had to occur

    Reunification, a WW2 legacy led to EZ crisis

  • rate this

    Comment number 66.

  • rate this

    Comment number 65.

    The Financial crisis was not precipitated by the Investment Banks, but by Retail Banks encouraged, for political means, to lend money to people who could not afford realistic loans.

  • rate this

    Comment number 64.

    Quite simple; If it is introduced in isolation of the rest of the world, then it will have a detrimental effect on businesses in those countries that introduce it. There is also the fact that it is a new tax, when it is spending reductions that should be the focus. The rate is low now, but as with all taxes the rate will go up.

  • rate this

    Comment number 63.

    So, the ECB is to take control of the ESM and therefore this should end banking problems ? Dream on Eurozone ! The ESM would need two or three 'trillion' euros to just scratch the surface. So far only 500 billion has been raised (allegedly) and a large slice of that has already been allocated. Its hardly a cookie jar is it? Considering it is not cash it is additional debt for whoever takes it.

  • rate this

    Comment number 62.

    "The OECD warned that EZ countries were diverging rather than conveging in 2002"

    Basques want out of France, Catalans out of Spain, the Flemish don't want to suport Wallons in inty-bitsy Belgium, Scotts want out of UK, Northern Italians refuse to support "lazy Southerners" anymore.

    United States of Europe as "counterbalance to U$A"?

    A pipe (hashish) dream.

  • rate this

    Comment number 61.

    Regardless of the European crisis or institutional change of the day, it is unimportant compared with the big picture - the slow, inexorable decline of European countries in the world economic and political stage.
    Non-European G20 countries are passing Europe by, and the club of countries that think they are important world players will swell, diminishing Europe's standing to the sidelines

  • rate this

    Comment number 60.

    Don't be blaming the Banks, the problem always lies with the borrower and their frivolous expenditure.

  • rate this

    Comment number 59.

    To a US hating Canadian: "While EU coming together, US failling apart."

    U$A has been falling apart for 200 years,

    While EUSSR (unable of the necessary SYSTEMIC reform) is collapsing before our very eyes merely a decade after it was set up.

    So nice try, but not cigar, comrade

    Btw. Canada's Finance Minister has stated that unless US moves away from the cliff hanger - Canada is toast.

  • rate this

    Comment number 58.

    There is a simple solution; Spain joined the meal train, but if it can not afford the ticket, it needs to get off and find its own way. In order for Spain to recover, it's people need to recognise that Discipline goes hand in hand with Solidarity.

  • rate this

    Comment number 57.

    Germany is not alone in objecting to the indolent idealism of the South. Those that cast blame on Merkel are the same people that caused the problems in their own countries and are using Merkel as a scape-goat to redirect attention from their own faults.

  • rate this

    Comment number 56.

    "The OECD warned that EZ countries were diverging rather than conveging in 2002"

    I'm sick of IMF, OECD or the likes that are always advocating austerity

    you quoted out of context, THe 2002 OECD report warned of the Euro crisis due to increasing divvergence of EZ economies It has nothing to do with austerity.

  • rate this

    Comment number 55.

    UK - have your referendum and be done with it. Neither you nor the US is in any way 'esceptional' except in the stupid/greedy department. The EU needs the FTT, get on with it. Never underestimater the power of the People when they think they have nothing to lose, Austerity will not be tolerated by the People unless they see the top 10% suffering too. End to US/UK dominance will be enlightening

  • rate this

    Comment number 54.

    4 Minutes ago
    47. powermeerkat

    [I give it 48 months tops]

    ... more accurate prediction than the Mayan Calendar!!!

    Mayan Calendar (familiarize yourself with it) does not predict an END of the WORLD but merely the end of an era/cycle.

    I submit that no event the end of post WWII/post-Communist era, but merely of a failed EZ cycle.


  • rate this

    Comment number 53.

    The fundamental problem is the financing of the borrowings, not the absence of growth. The Eurozone will be held back until the financing is sorted out.

  • rate this

    Comment number 52.

    ..tyrannical socialist fantasies,but there is nothing new in that

    if you think the EU is socilaist then you understand nothing, The Eu is economc neo-liberal = free market small government conservativism, its a text book like example of what happens if you try to create a neo-liberal state

  • rate this

    Comment number 51.

    You can't force anyone to buy goods. Germany has for decades been renowned for its high quality products, whether cars, machinery, electrical goods etc.

    There were no shenanigans involved and it is an insult to the energy, inventiveness and hard work of the German people.

    Just look at failures of Siemens trains in China, etc., as well the growing megascandal at Deutsche Bank.

  • rate this

    Comment number 50.

    47. powermeerkat

    [I give it 48 months tops]

    ... more accurate prediction than the Mayan Calendar!!!

    PM, we were hear 3 years now hearing that collapse of euro comes this month, next month in a year... maximum up to end of 2010, 11, 12...

    ... oh common ... it is worse than New Age World End predictions!

    Cool-aid anyone?


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