News Column

Eurozone Gears Up for Make-or-Break Year

December 4, 2012

Andrew McCathie

The eurozone is heading into what is shaping up to be a make-or-break year for the 13-year-old currency bloc. For the moment, however, a fragile calm appears to have settled on the eurozone, amid the three-year-old battle to save the euro.

This follows the European Central Bank's unveiling of new emergency measures aimed at shoring up confidence in the 17-member currency bloc and amid signs that the region's leaders are coming to grips with the long-running debt crisis.

Many analysts have also been talking about the hope, after years of contracting growth and tough reforms, that the region's economy might gain momentum during the final part of 2013.

"Yes, there is light at the end of the tunnel, but we still have a long way to wander in the darkness," said ING Bank economist Carsten Brzeski.

Indeed, signs have already emerged that the eurozone economy could initially lurch deeper into recession in 2013, while the threat of renewed market pressure continues to loom over members states considered vulnerable by investors.

In addition to Spain and Italy, concerns are growing in Europe that France could also be facing turbulent times.

This comes after the downgrading last month of France's credit rating by the international rating agency Moody's, which highlighted Paris' struggle to boost economic competitiveness and cut back its high budget deficit and debt levels amid weak economic growth.

Moody's went on to downgrade the euro rescue mechanism, partly because of the large French contribution to the funds.

Considering France's central role in European affairs, fears that the eurozone's second-biggest economy could turn into the currency bloc's new weak link could lead to a renewed fall in investor confidence.

Nevertheless, as the year comes to an end, a more positive mood appears to have returned to European financial markets, after a long period of volatility caused by euro break-up concerns.

In particular, last week's agreement to cut Greek debt and the ECB's offer in August of a new bond-buying government programme have helped to stem the rise in borrowing costs for nations such as Italy and Spain.

However, the prospects of the eurozone economy contracting further in the coming months could unleash fresh pressure on heavily indebted eurozone states as they battle to clean up their finances against the backdrop of dwindling economic growth and a rising tide of unemployment.

In addition, any improvement in the world economy depends on the US political elite hammering out a fiscal deal to keep America from plunging back into recession.

A bleak economic outlook also raises the risks of greater and more violent unrest in recession-struck parts of the eurozone.

At the same time, slower growth could add to the sense of bailout fatigue in the region's major economies, where voters are growing angry about the costs of austerity.

This will make it even harder for European leaders to take the tough decisions they face next year, such as finalizing a banking supervisory authority or helping the eurozone emerge from the crisis.

The problem for Europe is that the fate of its plans for holding the currency bloc together could once again be in the hands of the voters next year, with national elections scheduled in both Italy and Germany.

The elections in both nations are likely to represent key tests of the electorate's mood in the eurozone's biggest and third-largest economies.

But the risk is that the build-up to the elections could coincide with moves in financial markets to test ECB chief Mario Draghi's resolve to do what it takes to preserve the euro. Such tests could include fresh attacks on the assets of nations such as Spain.

Many analysts already believe that Madrid will be forced to seek a full European-led bailout early next year, after already agreeing to aid for its banks this year.

The Greek saga is also by no means over. The International Monetary Fund has indicated that it might pull out of last week's debt agreement if Athens fails to implement a debt buyback scheme, a key part of the deal.

That could mean a bid by Spain for financial help combined with a threat to the Greek emergency aid package could push the debt crisis back to centre stage in European political life just as Italian and German election campaigns pick up speed, meaning yet more twists and turns ahead.

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Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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