Eurozone 2013 Breakup Now Even More LikelyPolitics / Eurozone Debt Crisis Dec 20, 2012 - 12:13 PM GMT
Martin Hutchinson writes: To the complete shock of several analysts, the Eurozone managed to make it through 2012 without breaking up. However, 2013 is another story.
Now that Italy's Prime Minister Mario Monti has resigned, there's a good chance that Italy will be in the forefront of a new Eurozone crisis.
That means 2013 doesn't look to be a good year for the euro, either-especially with new Italian elections likely to take place in February.
Of course, the EU establishment hopes that Monti can remain in office, but with four very different candidates now jockeying for position, Italy is one of the continent's great question marks.
The leading candidates in this crucial contest include:
•Silvio Berlusconi, leading the remnants of his former rightist coalition,
•Monti himself, currently in negotiations with several centrist parties,
•Luigi Bersani, leading the left-wing Democrats, currently regarded as most likely to win
•And comedian Beppe Grillo, whose Five Star Movement is leftist and anti-authoritarian.
Of these four, only Monti and Bersani would represent the continuation of the status quo.
Meanwhile, the return of Berlusconi, whom the establishment forced out in 2011, would be a nightmare for the euro. That goes for the ascension of Grillo as well.
In the balance of this pivotal contest could be the fate of the Eurozone itself.
At the extreme, Berlusconi or Grillo (or a coalition between the two) would almost certainly take Italy out of the euro, since Italy is capable of surviving independently. After all, its current account deficit is only 1.4% of GDP.
What's more, any move toward independence by these two would allow Italy to throw off the EU-imposed "austerity" policies that have inevitably proved both unpopular and recession-causing.
At the other end of the spectrum, a Monti government (if one could be formed) would continue austerity and allow the euro to survive - at least until some other country such as France or Spain blew it up.
In the same vein, Bersani would attempt to keep Italy in the euro but would reject public spending cuts and demand even more handouts.
Judging by what Greece has been allowed to get away with, this might well work for a time, but one has to have real sympathy with the German, Finnish, Dutch and Estonian taxpayers who will be made to pay for all this.
2013 Eurozone Forecast: There's More To It Than Italy
And there's the sleeper problem, France. Even if Italy doesn't blow up the euro there's a good chance France will.
Don't be fooled by those bond yields, either. French 10-year government bonds currently yield only 1.97%, far below the 5-6% yields of equivalent Spanish and Italian government bonds - but that only proves that bond dealers can't recognize a crisis until it hits them in the face.
In 2006, after all, they were trading Greek bonds at less than 0.5% yield above German bonds. So much for rational markets.
What's also worrisome are the disappearing French millionaires. They are leaving the country in droves because of President Francois Hollande's ridiculous new tax policies.
It started when Bernard Arnault, France's richest man, made headlines when he renounced his French citizenship for Belgium in October.
However, this flight of wealth is not limited to the hyper-rich like Arnault. Last week it was revealed that French film star Gerard Depardieu had also moved to Belgium. Since Depardieu is a chevalier of the Legion d'honneur and of the Ordre national de Merite, it's not as if he doesn't have substantial ties to his homeland.
Anecdotally, many other wealthy Frenchmen, less well-known than Arnault and Depardieu, are making the same decision. It is tough to live in a country which not only taxes your income at 75%, but then adds an annual wealth tax of up to 2% on your capital.
Meanwhile, France currently has a budget deficit of only 4.5% of GDP, but that will go up, especially as the country is expected by the Economist team of forecasters to have only 0.1% economic growth in 2012 and none at all in 2013 - and given the exit of millionaires, the latter estimate is almost certainly too optimistic.
A Myriad of Reasons the End Is Near
If you want other reasons why the euro might break up in 2013, there is a laundry list of reasons why the end is near.
You can try Greece (even the Germans may someday get fed up of exorbitant Greek bailout demands.) Then there's Spain, which is pretty rickety but no more than that, provided its richest province, Catalonia, doesn't try to secede.
Or Cyprus, which is bust, but most likely to get a bailout from the Russian Mafia who dominate its economy. Or there's Portugal, which everyone's forgotten about and is trying manfully to solve its problems, but is expected to suffer 3% declines in GDP both this year and next - EU-imposed austerity is yet again proving very painful.
Then there's Slovenia, which ought to be rich and solvent, but through mismanagement has managed not to be solvent. And Ireland, which has got part way to solving its problems but isn't out of the woods yet.
You get the picture.
What's more, Germany has an election in September/October 2013.
Currently the Germans appear docile, likely to re-elect Angela Merkel, or possibly her Social Democrat opponents, who are committed to the euro and bailouts.
But if the road between now and then has been too rocky, even German voters may decide giving the government a blank check for four more years of bailouts isn't too smart.
In that case, they will doubtless find a German equivalent of Beppe Grillo and throw the EU into even more confusion.
It's possible that the euro will survive in its current form until next December. But I wouldn't put much money on it.
However, the eurozone's troubles and the United States' apparent strength should make it an excellent year for a European vacation!
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