Euro-pocalypse not now


Next year could see pressure on European unity coming less from the markets and more from the streets.


Philippe Huhuen

BRUSSELS, Belgium — The ancient Maya may not have had much to say about Europe's shared currency, but there were plenty of others willing to predict the euro would meet its doom in 2012.

In the end, the euro zone survived intact and will limp into 2013 with fears of an imminent euro-pocalypse much diminished.

No one should have any doubts, however, that the crisis is anywhere near over.

"Next year we will have very low growth rates,” German Chancellor Angela Merkel said at the European Union's year-end summit last week. “We will see negative growth in some countries and we can expect very high unemployment levels to continue."

"We have accomplished a lot,” she added, “but we also have tough times ahead of us."

The euro crisis morphed in 2012: Next year could see pressure on European unity coming less from the markets and more from the streets.

The European Central Bank's September pledge to deploy its vast reserves to prevent a euro zone meltdown, backed by decisions taken at this year's eight EU summits, went a long way to convince markets the currency bloc would hold together.

But as fears of a debt-induced breakup recede, there's mounting concern that the real economy could pose an even more fundamental threat to Europe's future as some countries face a seemingly endless recession that's generated record levels of unemployment and rising social unrest.

"The situation is still explosive," says Carsten Brzeski, senior economist at the ING banking group.

"The threat of an existential crisis has been pushed away for the time being because the leaders showed political commitment to the euro, but with this economic crisis, that existential threat could easily return."

Greece's economy is still on life-support. Despite being drip fed with international bailout funding, it's forecast to shrink by 4.2 percent in 2013, on top of a 23 percent contraction since 2009.

Portugal, Spain and Italy also face another year of recession, rising unemployment and street protests as austerity measures introduced to lower debts and deficits are blamed for the hardship felt by millions.

According to the EU's own predictions, 2013 growth across the whole 17-nation euro area will be an anemic 0.1 percent, compared to 2.3 percent in the United States, 0.8 percent in Japan and 7.7 percent in China.

"We are in for a vicious circle of no growth, low employment and further austerity," warned Karel
Lannoo, chief executive officer at the Centre for European Policy Studies, a Brussels think tank. "They are tackling the past crisis and not the future one."

Without hope of an economic turnaround, expect strikes and protests to intensify in Athens, Lisbon and Madrid.

Voters may continue to show their discontent by backing parties previously on the political fringes, from neo-Nazis in Greece, to Portugal's Left Bloc, hard-line separatists in Spain's restive regions and the Five Star movement of Italy's anti-establishment comedian Beppe Grillo.

There are plenty of pro-growth ideas out there. The "blueprint" for greater economic unity presented by the EU's headquarters in November includes plans for a redemption fund to support highly indebted countries; "euro bills" to share out their debt burdens; and special EU financing to help nations introducing difficult economic reforms.

Others have called for an investment program inspired by Franklin Roosevelt’s New Deal, which helped drag Americans out of the Great Depression in the 1930s.

Such plans will be up for EU leaders to debate during their seven (so far) scheduled summits throughout 2013. Expectations of decisive action are low, however, at least until the end of the year.

That's because all the growth plans require Europe's paymaster-in-chief to dig deep and with national elections looming in September, Merkel is unlikely to tempt voters’ ire with major new schemes for transferring billions of euros to the troubled south.

"One should not expect major breakthroughs in 2013," Janis Emmanouilidis, senior policy analyst at the European Policy Centre think tank, wrote this week. "The current German coalition government will do its best before the election to contain the crisis and avoid any developments or major new initiatives which might force Berlin to move beyond previously-defined red lines."

The other election sure to influence the crisis will be Italy’s, probably in February or March.

Other European leaders have viewed the prospect of a return by media mogul Silvio Berlusconi with alarm, given his previous economic record as prime minister. At last week's summit, several expressed backing for his successor Mario Monti, the economist called in a year ago to steady the Italian economy after Berlusconi's almost 10 years in power.

But opinion polls point to victory for the center-left candidate Pier Luigi Bersani, who has pledged continuity with Monti's reform program.

Developments in France could also prove crucial for the fate of the euro zone in 2013. Socialist President Francois Hollande has been vocal in calling for a stronger pro-growth agenda in Europe, but there are mounting market fears about the state of France's own economy as it slips further behind its neighbor Germany.

France has averaged economic growth of 1.2 percent over the past three years, compared to 2.7 percent in Germany, while French unemployment has grown to 10. 2 percent. Germany's has steadily declined to 5.5 percent.

Those figures have helped France slip from 15th to 21st place since 2010 in the World Economic Forum's latest Global Competitiveness Report. It ranks 141 out of 144 countries for its hiring and firing practices.

Hollande faces a tough task in 2013. He must counter perceptions his country is increasingly uncompetitive and unfriendly for business while placating demands from left-wing supporters to maintain job protection, government spending and high taxes on corporations and rich individuals.

Perhaps surprisingly as 2012 draws to an end, there’s been a smattering of good news from euro-land.

In the week before Christmas, the ratings agency Standard and Poor's hiked Greece's credit assessment by six notches after years of downgrades, and the European Central Bank announced it will start accepting Greek bonds as collateral for the first time since July.

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There was more: Portugal's borrowing costs fell to their lowest levels in 22 months, Madrid's stock exchange was the highest since March and Germany's main business-sentiment indicator saw its biggest monthly rise since the summer of 2010, while the euro reached its highest level against the dollar since April.

EU officials in Brussels hope the run of optimistic snippets will continue in the New Year as the reforms of the past two years start to take effect.

However, it will take more that to convince the EU's 26 million unemployed that things are really getting better.