Europe’s squabbling policymakers “can boast at least one achievement during 2012”, says Jack Ewing in The New York Times. Their currency “still has a heartbeat”. A year ago, a chaotic break up of the euro was widely feared. Now, the crisis is deemed to have become a chronic, rather than acute, problem.
Last year’s key events
European Central Bank (ECB) president Mario Draghi promised in July to do “whatever it takes” to save the euro and insisted that “it will be enough”. He said he would make unlimited purchases of indebted countries’ bonds in the market, thus driving down their bond yields, or borrowing costs, and allowing them to avoid default.
So far, he hasn’t had to buy any bonds. The mere prospect of limitless ECB resources being brought to bear on the bond markets has calmed investors, lowering peripheral bond yields.
The market’s mood was also greatly improved when Germany, after a few months of apparent ambivalence, signalled that it wanted Greece to stay in the eurozone, says Eric Frey in Der Standard. So Germany has evidently decided not to risk the possible Lehman-style meltdown of the European peripheral countries that could well have resulted from a Greek exit.
But while the threat of a chaotic eurozone break up has fallen significantly, it hasn’t completely disappeared, warns M&G Investments. There remains a danger that eurozone states will tire of austerity and decide to regain control over their interest rates and currencies in order to bolster their economies.
So social and political unrest, rather than a country’s “technical inability to repay its debts”, could be the reason countries pull the plug on their euro membership.
Potential flashpoints this year
“Of course, whether and when this happens is anyone’s guess,” says M&G. But the politics of austerity will continue to shape events this year. One problem is that the eurozone has fallen into recession, making it ever harder for the southern states to reduce debt, while the core economies will be even more reluctant to keep bailing out the basket cases.
Meanwhile, analysts are keeping a close eye on Italy’s national elections, due in late February. “Italian politics have not been so volatile since… the early 1990s,” says Guy Dinmore in the Financial Times. The current prime minister, Mario Monti, has impressed investors with some growth boosting reforms, but his centrist grouping seems unlikely to continue to wield much power in a potential post-vote coalition with the centre-left. To what extent this could water down Italy’s reform efforts, and thus reawaken jitters over a possible Italian default, remains to be seen.
Germany also goes to the polls, but not until September. Chancellor Angela Merkel doesn’t want to have to discuss writing off a portion of official loans to Greece, especially as taxpayers are not supposed to lose money on bail-outs. Yet Greece’s economy looks set to keep undershooting official forecasts.
A bad start to 2013 would leave Greek economic and budget deficit forecasts “looking virtually unachievable by June”, says Ben May of Capital Economics. So in the build up to the election, Germany could face having to restructure its Greek debt or refusing to offer Greece yet more help, allowing the bail-out to collapse.
Germany and Brussels will do their best to avoid this scenario, so eurozone policy will probably be to ensure that “absolutely nothing happens” before September, says John Dizard in the FT. So in 2013, euro leaders look especially likely to demonstrate their “supreme talent for fudge and procrastination”, says Halkin Services.
An actual resolution to this crisis, however, would involve political union to back up the single currency, and progress in southern states towards boosting competitiveness and thus growing out of the debt problem. These still look years away.