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The euro at times in 2012 seemed close to collapse as one member of the EU after another experienced public debt or banking emergencies. Michael Probst / AP Photo
Michael Probst STF
The euro at times in 2012 seemed close to collapse as one member of the EU after another experienced public debt or banking emergencies. Michael Probst / AP Photo

The euro zone in 2012: Cuts, cuts, cuts and cuts again

Look Back 2012 Last year began with warnings of a tough period ahead for Europe - and there is no sign of any quick fixes in 2013.

At a time when Europe's finances remain entrenched in a state of crisis, contributing to rampant unemployment, painful austerity and mass protests on the streets, a decision to award the European Union the Nobel Peace Prize raised more than a few eyebrows.

The broad picture for the continent hardly makes for scenic viewing. 2012 was a year that began with a warnings of a tough period ahead from Christine Lagarde, who followed the disgraced Dominique Strauss-Kahn as head of the IMF, ended with no sign of quick fixes.

The euro at times seemed close to collapse as one weak member of the single currency zone after another experienced public debt or banking emergencies. For some analysts, the big surprise is not the stubborn nature of the crisis but that its greatest casualty, Greece, has somehow remained part of the single currency as the bells ring in 2013.

The Nobel prize was awarded in December to mark the EU's role in promoting peace, democracy and human rights over the six decades of its existence.

The union's champions argue that economic tensions, which have provoked robust differences of views between nations but stopped far short of causing conflict, make its efforts in diplomatic and humanitarian fields all the more admirable.

"At a time of uncertainty, this day reminds people across Europe and the world of the union's fundamental purpose: to further the fraternity between European nations now and in the future," said the EU president Herman Van Rompuy in his acceptance speech. "It is our work today, it has been the work of generations before us. And it will be the work of generations after us."

So how do those "times of uncertainty" look as 2012 is ushered out?

On the positive side, there was a remarkable show of unity among the 27 EU members, in forging a collective assault on the government overspending that has contributed to crisis. Only Britain, which sticks rigidly to its sterling currency and is more likely to leave the union than embrace the euro, and the Czech Republic declined to sign up to the fiscal compact designed to impose financial rigour on all nations.

One measure of this agreement is that the details survived intact despite being largely the work of the Franco-German axis that remained relatively strong until the conservative French president, Nicolas Sarkozy, was toppled by the socialist François Hollande in May.

Mr Hollande had made it a campaign pledge to demand the renegotiation of the budget deal. He sparred a little with Berlin but in the end, to the disdain of sections of the French left, settled for modest promises to make a quest for growth, and not just austerity, central to policy for kickstarting the European economy.

But this solidarity does not lessen the extent to which Ms Lagarde's prophecy - "clearly we should all be prepared for a 2012 that will not be a walk in the park" - has come true.

If the continued travails of Greece concentrated most euro-minds, other countries had bruising encounters with reality. The credit ratings agency Standard & Poor's delivered "must do better" reports on nine EU countries and among those whose ratings were downgraded were Italy, Spain and France.

The charge to force Greece to comply with an excruciating programme of austerity was led by the German chancellor, Angela Merkel. She spoke repeatedly of the country's need for self-help, for it to "stand back on its own feet and complete its tasks itself".

Even so, Greece's short-term future seemed delicate after elections in May saw a majority of voters siding with parties opposed to the harsh spending cuts and tax rises attached to bailout aid. When attempts to form a coalition collapsed, fresh elections gave victory to the pro-bailout New Democracy Party.

But the growing unemployment, fuelled by the bitter economic medicine administered in several European countries, unleashed widespread unrest. A day of protest rallies or strikes affected 23 countries in November. But the year ended on a slightly more optimistic note following agreement to establish a euro-zone-wide banking supervisor. And Standard and Poor's recognised Greece's determined efforts - and those of its euro-zone partners - to fight its way out of crisis, raising its credit rating six notches from "selective default" to B-minus.

Athens has been allocated €240 billion (Dh1.17 trillion) in two bailout packages from the EU and IMF and the latest slice, just less than €50bn, was released in December as the country continued to demonstrate a steely resolve to get to grips with debt.

But there is still little confidence in the euro zone's ability to reverse the lack of growth and relentless rise of unemployment - which reached a record 11.7 per cent across the zone in October and is as high as 50 per cent among young people in some areas, including Spain - that have dominated 2012.

For some experts, the obsession with belt-tightening is part of the problem rather than its cure.

Paul de Grauwe, a professor from the London School of Economics, told the BBC that the zone was in a "double-dip recession which is entirely self-made" and blamed "excessive austerity in southern countries".

But the BBC World Service's own economics correspondent, Andrew Walker, questioned whether there was a realistic alternative to severe austerity measures.

He did, however, acknowledge the merit of debate on how rapidly countries should deal with debt burdens that had been rising unsustainably. Even the IMF suggested there was a case for moderating the pace of cuts, he said.

For now, however, the policy of cutting seems destined to continue.

Warning of a further shrinkage of the euro-zone economy by 0.3 per cent over 2013, gloomily replacing an earlier projection of 0.5 per cent growth, Mario Draghi, president of the European Central Bank, said simply: "It is a very high price but it is unavoidable."

business@thenational.ae

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