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Tourists relax on rocks in front of the Costa Concordia wreckage on the Giglio Island, Italy, Thursday, July 12, 2012. Works have begun to remove the tons of rocky reef embedded into the Concordia cruise ship's hull, a first step in plans to eventually tow the wreck away from the island, where it ran aground last January. The whole removal process could take as long as a year. In a broadcast interview Tuesday, Concordia's captain Francesco Schettino described the collision as a "banal accident" in which "destiny" played a role. (AP Photo/Gregorio Borgia)
Tourists relax on rocks in front of the Costa Concordia wreckage on the Giglio Island, Italy, Thursday, July 12, 2012. Works have begun to remove the tons of rocky reef embedded into the Concordia cruise ship's hull, a first step in plans to eventually tow the wreck away from the island, where it ran aground last January. The whole removal process could take as long as a year. In a broadcast interview Tuesday, Concordia's captain Francesco Schettino described the collision as a 'banal accident' in which 'destiny' played a role. (AP Photo/Gregorio Borgia)

A brighter outlook after euro zone tumult in 2012

This year the euro saw some stability, thanks in part to the ascendance of Mario Draghi, the hard-nosed Italian economist, but the euro zone is by no means out of the woods yet, writes Paul Hockenos

Could 2012 be the point that, after three long years of turmoil, the beleaguered euro finally turned the corner?

For all the indications that this might be so, in Europe's Unfinished Currency: The Political Economics of the Euro, the German economist and author Thomas Mayer argues this is definitely not the case. The European Monetary Union, the economic mechanism underpinning the euro, was never intended to be an all-for-one and one-for-all club in which economically healthy nations pay for those who mismanage their finances. "The possibility of sovereign default in the EMU is essential to enforce fiscal policy discipline in a monetary union of sovereign states," he argues. "No set of rules imposed by Brussels can replace the disciplinary influence of the risk of failure."

Rather than go the way of helping insolvent countries back on their feet, Mayer's route of choice would have been to carve a smaller, tighter euro zone out of the northern European countries and maybe France, too. The laggards would revert to national currencies and make do on their own. Given the fact that Europe - and in particular Germany - is now united and peaceful, the political impetus for the single currency is gone anyway, he argues. Future historians, he writes, "will look at this crisis either as the catharsis needed to mature the young European currency or as the moment when the unstoppable force of political ambition met the unmovable object of economic reality."

Thankfully for the euro, the European Union, and Europe as a whole, Mayer's Germany-centric views are not the majority opinion of any of Berlin's political parties - though these views do have outspoken adherents across the political spectrum. A year ago it was not entirely out of the question that Germany and others would opt for such a course. But after much prodding, Angela Merkel has elected another path, one that values European unity and judicious solidarity over narrow national interests. All of Europe and beyond can breathe a sigh of relief for this.

Admittedly, 2012 was a veritable roller-coaster ride that saw governments fall, general strikes shut down whole countries, EU co-members clash like nemeses, most countries enter recession, and the possibility of a British exit become a real option. Yet the prospects of the euro bloc now look better after prolonged turbulence that shook markets across the globe and even caused many to question the relevance of the EU itself.

Indeed, 2012 is the year that the seemingly endless procession of high-level summits (22 since 2010) resulted in new regulations and bailout-firepower that finally calmed the nerves of jittery markets - at least for the meantime. This was a prerequisite to getting down to the brass tacks that could get the euro zone back on track and give the common currency a long-term future.

The game-changer was the appearance of Mario Draghi, the resolute Italian economist at the front of the European Central Bank (ECB). Draghi replaced the German Jürgen Stark, whose views weren't so far removed from those of Mayer. Stark resigned his office rather than use it to rescue bad banks and profligate countries, which in addition to upending moral hazard could have opened the door to creeping inflation, a bugbear the Germans still fear.

Within weeks of his appointment, Draghi took concrete measures to expedite the cash flow in European financial markets and boost liquidity. The lowering of interest rates made borrowing for the southern Europeans somewhat easier, though still not enough for anyone to really rejoice.

The ECB would, Draghi assured the world, "do whatever it takes to preserve the euro". He backed up that grandiose pledge in September by announcing that the ECB was prepared to buy the debt of euro zone stragglers in the form of bonds. This was the decisive and long-awaited move to make the ECB the euro zone members' lender of last resort. By proclaiming that the ECB could and would pick up the debt of individual countries, it finally created a "backstop" that ruled out the possibility of the likes of Greece crashing and burning. The markets, as well as Washington, the IMF and many euro zone members, had long insisted this was required to convince everyone that the troubled debtor nations, above all Spain and Italy this year, would not go the way of Greece. The new powers, on top of the permanent bailout fund ESM becoming operational this year, appeared to nip the threat of further "contagion" in the bud.

The bond-buying option (it was not tested in 2012) was so contested, primarily by Germany, since Merkel had resisted any changes in the direction of a bona fide transfer union. One key precondition of the European Monetary Union, as Mayer underscores about the mechanism that launched the euro, was that every country was responsible for its own budgetary calculus, including the accumulation and pay off of debt. Though the euro zone is still not a full-scale transfer union - something Germany still appears unwilling to allow - the ECB's new powers made the wealthier, healthier nations more responsible for the woes of their less endowed co-members.

A second formidable arrow to Draghi's quiver are new banking regulations for the euro zone that gives the ECB unprecedented control over the bloc's largest banks as well as those that do cross-border business. It will assume responsibility for supervising about 200 of the continent's banks, namely those with assets of €30 billion (Dh146bn) or whose assets represent more than a fifth of a nation's economic output. The banking union is a key building block of wider economic union, say observers, and constitutes determined progress on coordinating the EU's response to problem banks. The bold overhaul sends another strong signal to investors and markets that the euro zone's disparate members can find common ground to tackle the bloc's problems.

The bank deal is so huge because it is exactly the kind of economic integration that most experts say is essential to underpinning a healthy common currency. It's the centralised coordination that many economists warned that the common currency should have had upon its creation. Robert Peston, the BBC's business editor, said: "The deal may represent the most significant new transfer of national powers to a euro zone institution since the crisis erupted in the currency union - and, for many, it represents the first step towards the kind of centralisation of decision-making that's necessary for the euro zone to survive."

The banking supervision comes on the heels of tighter fiscal integration in the form of a Fiscal Compact signed in March - another cornerstone of a new kind of euro zone. All of the EU (save the Czech Republic and the United Kingdom) voted to mandate stricter budget discipline. The landmark treaty to coordinate budget policies and impose penalties on rule-breakers ties the euro zone nations even more closely together and transfers yet another small but significant element of national power to Brussels. Among other stipulations, it includes a "balanced budget rule" for national legal systems and automatic mechanisms to force states to correct budget deficits.

As for bailouts, there was one for Greece and one for Spain. The Greek rescue package - and its terms - were particularly significant as last year many thought that Greece might truly be forced, or opt of its own volition, out of the euro zone. In light of the withering austerity conditions imposed upon Athens, some even expected the new conservative government, elected in June, to collapse before the year was out. But despite mass protests on the streets and an ever contracting economy, the leadership stands in better stead than it did six months ago - as does Greece.

While the conditions for Greece and the other PIIGS (Portugal, Ireland, Italy, Greece and Spain) remain extremely tough - higher taxes, spending cuts, slashed wages - there was a shift in 2012 away from the German-led "austerity at any cost" demarche. In part, the Merkel administration's arm was twisted by fellow EU nations and the IMF. In France, national elections punished Sarkozy, Merkel's key ally, while delivering Francois Hollande to office, a socialist committed to tempering the austerity treatments with growth strategies.

The funds to rescue Greece have gone through in spurts even if Athens has resisted many of the structural reforms and repeatedly missed EU and IMF-set fiscal targets. Moreover, Greece's international lenders agreed to take steps to reduce the country's debts by nearly 20 per cent, and cut the interest rate on loans to Greece. This is what it has taken to keep the Greek economy afloat - and stop speculation about an imminent "Grexit".

Despite the news of a poor final quarter, the year came to a close on a further uplifting note with more plans for big-picture reform and a (voluntary) programme designed to fight unemployment among the bloc's young people. With German elections looming in late 2013, few observers think that much can be done early next year to build on the biggest accomplishments of 2012. But there's plenty to do driving forward what has been put in place.


It's too early to jump to the conclusion that the euro is out of the woods - or that the likes of Thomas Mayer are entirely wrong. For those who see ever closer integration as the only way forward, the reforms begun in 2012 are only the beginning.

Moreover, much of the zone remains mired in recession. The crisis is most dire in southern Europe, where although there is no longer talk about Greece leaving the euro zone, there is no sign yet of growth. The same goes for Spain and Portugal. Economists say that the southern Europeans are not just around the corner from the kind of recovery that will one day pull them out of debt. At the year's final summit, Merkel warned that the bloc faced two years of painful reforms, slow growth and persistent high unemployment. Critics say that insisting upon rigorous austerity could keep these economies down for a decade or more unless means are available to help their economies revive.

Moreover, the more closely Europe integrates without consulting its demos, the greater the notorious democracy deficit becomes. There is no consensus among the populations of the euro zone's members that their monetary and fiscal policy should be determined in Brussels. Far left and far right parties have thrived on the general dissatisfaction with the European Union.

With a little luck though, the very worst could be behind the euro zone. At least it seems to have averted disaster. This is something to be said for the tumultuous year of 2012.

Paul Hockenos is a writer living in Berlin.

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