European leaders could be forgiven for having a sense of deja-vu, having met eight times in 2011 to discuss the eurozone debt crisis.
Fears of contagion appear to have become a reality, with the problems of the periphery now affecting the core.
Social unrest over austerity measures grew and several European governments, including Greece and Italy, were toppled. And leaders finally acknowledged the scale of their problems. As German Chancellor, Angela Merkel, states:
“It’s true we’re experiencing one of Europe’s most difficult crises.”
2011 also brought more bailouts. Portugal became the third country to receive one, while Greece negotiated its second.
The crisis also began to hit more important economies like Italy and Spain, who both found it increasingly difficult to finance themselves on the bond markets.
Even France – which helped create the euro – is now being warned it may lose its AAA-credit rating.
Michael Hewson is an analyst at CMC Markets. He says the European leaders didn’t act quickly enough to prevent a contagion.
“What they failed to do was to say, ‘Right, we’re going to backstop this with a massive bailout fund.’ They tinkered about the edges with the EFSF, said they were going to boost it up to the total 440 billion euros, but that needed ratification in all the member parliaments.”
Suggestions to end the crisis ranged from making the European Central Bank the lender of last resort, to issuing joint euro bonds. But some countries, including reluctant paymaster, Germany, don’t agree with either of these solutions.
At that final EU summit of the year, EU members – apart from Britain – agreed to work on a new treaty aimed at creating closer fiscal union.
“It’s binary. You either have full fiscal union, or you have euro break-up. There’s no in-between. We’ve had the in-between for the last 11 years. So these member countries have to agree to intrusive, forensic inspection of their budgets, they have to agree to the giving-up of fiscal sovereignty and if they don’t want to do that, they have to decide whether or not they belong in the euro.”
Hewson’s not the only analyst who thinks a eurozone breakup is more likely now than 12 months ago.
Mark Cliffe is Chief Economist at ING Commercial Bank. He’s looked at the potential impact of Greece leaving the eurozone, and what would happen in a complete breakup…
“There’s absolutely no doubt in my mind that there would be huge declines in economic activity, which would extend at least for a year or two.”
Many analysts see 2012 as the make-or-break year for the eurozone. It could also make or break some European citizens.
One thing is certain: 2012 will bring more austerity – and times look set to get worse before they get better.