Only thing that really matters in 2013: is eurozone crisis over?

 On the morning of May 7^th 2012, Greek voters woke up to discover that they had effectively voted to leave the EU. A majority of the new  members of parliament were in parties that rejected the crippling terms of the latest EU £110bn bailout package. It looked like the beginning of the end for the 11 year old European single currency. The cracks in the European Union began to look unbridgeable

Bond investors across the world reached for their phones. Many financiers decided that the euro was finished, and they placed their massive bets accordingly. It was reported that Lord Rothshild of the banking dynasty, had personally taken out a £130m“short” position against the battered single currency. Surely, the EU could not recover from this! If Greece fell, then so would Ireland, Spain, Portugal and Italy which were all in the same deflationary boat – saddled with over-valued currencies, forced to cut spending in a recession, crippled by unsustainable interest rates on their massive debts. A new word was coined to describe the countries on their way out: “Grexit”

Europe's political leaders seemed caught in the headlights; unable to reconcile the need for fiscal discipline with the imperative of restoring economic growth. In Greece, where the economy had shrunk by 20%, violent social unrest had become an almost weekly occurrence as EU-imposed cuts made the recession even deeper. In Spain, unemployment among under 24 year olds rose to over 50%.. And the contagion began to infect the entire eurozone as France lost its triple A credit rating and Germany, the most powerful economy in the EU, plunged toward recession.

In Britain, the political classes awaited the inevitable. Most of the British media had decided long since that the euro was a dead duck and that it was only a matter of time before it collapsed. You cannot have a single currency without a central government and a central treasury, with the power to intervene in national budgets and the power to issue bonds for every member state. Surely, Greece and Spain would see sense and leave the euro, devalue their currencies, default on their debts like Argentina in 2001, and seek to recover on the basis of low wages and cheaper exports. What alternative did they have? Sticking with austerity was leading to economic depression and social unrest.

But somehow, the inevitable didn't happen. The Greek political parties couldn't agree on a government and decided to hold another election on 17^th June. This left the pro-austerity New Democracy, led by conservative Antonis Samaras,  with a reasonably firm mandate to stick with the euro, bailout and all. Greece would not default. Then, Mario Draghi, the head of the European Central Bank, announced that he would do “whatever it takes” to stop the single currency collapsing. Many believed this was just another empty promise from a bankrupt eurocrat, but Draghi proved true to his word. In September the ECB committed itself to unlimited purchasing of european government bonds, and the sovereign debt crisis began almost immediately to subside. The rate of interest on Greek, Spanish and Italian debt returned to pre-crisis levels.

At the close of 2012, it looks as if the euro is going to survive after all. The crisis has forced EU countries finally to address the problem of EU-wide financial regulation. At a summit in December it was agreed to set up a Single Supervisory Mechanism to regulate the largest eurozone banks, insure them against failure and protect member states against bank runs. This means that in countries like Spain, where banks have been collapsing due to bad debts, depositors will have their savings effectively guaranteed by the EU. The European Stability Mechanism has also mobilised around a trillion in euros to provide loans for countries facing sovereign debt crises and there are tighter rules in place restricting the size of national deficits. Europe, and the world, is holding its breath to see if enough has now been done to prevent catastrophe.

The countries of the eurozone gazed into the abyss in 2012. But contrary to expectations in Britain, they did not jump – possibly because they could not see the bottom of the  financial hole called "default".   Even at the height of the crisis last summer, Greek voters made clear, in opinion polls, that they didn't want to leave the single currency – and the same has been true across the Mediterannean countries - Italy, Spain, Portugal. Economists here hadn't taken into account the degree to which membership of the euro was bound up with the sense of national aspiration and even national pride. Countries like Spain and Greece, which had been dictatorships only forty or so years ago, did not want to leave a union which had, guaranteed freedom and prosperity for decades.    Europe has always been a political rather than a purely economic alliance, and in 2012 it was politics that saved the Union.

However, Britain has stood aloof from this new banking union.  Our banks will not be regulated by the ECB's mechanism.    2012 saw Europe move significantly down the road of full fiscal and economic integration,  a road that, it is increasingly clear, the UK government does not want to follow. In the year since Britain used its veto on the proposals for an EU-wide bailout fund, we have become ever more semi-detached. This month, David Cameron told MPs for the first time that British departure from Europe is “imaginable”. Under pressure from his own Conservative MPs and the eurosceptic UK press, the Prime Minister has been preparing a much-delayed speech in which he is expected to propose a renegotiation of relations with Europe backed by a referendum.

Françoise Hollande, the French premier, warned Cameron that an “a la carte” Europe is not on the agenda, and that members don't have the right to pick and chose. The option of turning the EU single market into a free trade zone has been decisively rejected by member states.    But David Cameron has resolved to seek his “better deal” in Europe and seems determined to put at risk Britain's very membership of the european club. Suddenly, at the end of 2012, it is not Greece or Spain that is looks as if it is heading for the Grexit, but the United Kingdom. The debate about whether Scotland would be ejected from the EU if it left the UK was replaced by questions over whether Scotland could be ejected from the EU if it didn't leave the UK.

But is the eurozone debt crisis over? Emphatically not. The entire eurozone is in recession again and will be for much of 2013.  And while the banking crisis may be nearer resolution, the growth problem is not after fully four years of austerity and fiscal tightening. As the burden of paying the debts of the banks grew ever higher, and the concomitant economic depression threw millions out of work, the finances of the governments of the eurozone were ruined. Governments found they had to take on huge welfare costs at the same time as they were losing tax revenues. It became a vicious financial spiral as the governments of Europe, under the stern direction of the European Central Bank, were required to cut their deficits during a recession, throwing even more people out of work and making the recession even deeper. This is almost exactly what happened during the Great Depression in the 1930s and no one with any sense of history can be confident that this will end without serious political turmoil.

There remains a deep division between so called “debtor” states in the south of Europe and the “creditor” countries of the north, led by Germany. In 2012, new kind of peripatetic financial bureaucrat emerged on the scene. The ECB “enforcers” sent by the so called “Troika” of the EU. European Central Bank and the International Monetary Fund, to push through public spending cuts in indebted EU states. In the Treasuries of Athens, Madrid, Rome, Lisbon, officials in dark suits moved in with their flow charts and spread sheets and ordered national governments to submit to what felt like financial dictatorship from EU institutions. In Italy, a financial technocrat, Mario Monti, simply took over the government without bothering with an election after the resignation of the eccentric Silvio Berlusconi. Monti is to stand down in the New Year, and Berlusconi is threatening to make a political comeback based on a proposal to ditch the euro.

The democratic deficit at the heart of the European Union is now becoming ever more apparent as the financial crisis develops. The EU is not a democratic body in the conventional sense, but an unelected bureaucracy overseen by a Council of Ministers drawn from member states. There is no elected federal government of Europe to go along with the new fiscal and monetary integration. In a sense, what has happened in Italy is happening across the entire eurozone, as technocratic eurocrats fashion policies that will severely constrain the financial freedom of member states. ECB enforcers may soon be descending on all national governments, inspecting their budgets and imposing restrictions before the national parliaments have a say in on them. Eventually, the voters are going to realise that management of their economies is being taken beyond democratic control. If so, Britain may not be the only country to demand a referendum. Perhaps it is time to coin a new term: “Brexit”.