I’ve talked about some wacky predictions in my previous article, but I thought that some topics deserve to be talked about in detail. The survival of the euro is one such topic.
In the past two years, the euro debt crisis has gone from bad to worse. It has stoked contagion fears, leading to market panic on a global scale. Looking at the top issues for 2012, it looks like it will be a big year for the euro zone as it will determine whether its currency will remain as is, shrink, or crumble. There are just so many things that could go wrong (or right) for the euro.
Issue 1: Lots of refinancing needed, but little capital to go around
Even though the European Central Bank (ECB) made it easier to borrow by offering 3-year loans back in December, commercial banks in the region will still be hard-pressed to get capital to refinance their debt this year as they compete with euro zone governments.
In addition to the 230 billion EUR they need to refinance, the market will expect them to buy large amounts of public debt. There’s a lot of uncertainty surrounding the debt crisis, and investors will think twice, thrice, or even four times before putting their money in euro-denominated assets.
Issue 2: The possibility of a recession and near-zero interest rates
There’s a lot of economic data coming out this January that will report on the euro zone’s economic status. The reports will be vital in determining the ECB’s next course of action.
If the reports are interpreted negatively, we could see the ECB finally take interest rates down to near-zero, similar to what the Fed had done at the peak of the global recession a few years ago. The thing with the ECB is that they can’t just engage in quantitative easing like Japan and the U.S.
The ECB is bound by rules and regulations that are unique because they must cater to the needs of 17 nations with varied growth rates. While a strong nation like Germany could survive with high interest rates, weak ones such as Portugal and Greece may struggle.
Issue 3: The ESM is predicted to be implemented this year
End-of-the-world predictions aside, another reason why 2012 is particularly important is because the European Council is aiming to launch the European Stability Mechanism (ESM) within the year.
If you recall, it was about a year ago when they first came up with the idea of the ESM, a permanent bailout fund designed to aid debt-stricken countries. According to Europe’s financial leaders, they’re hoping to get the ESM up and running once member states representing 90% of the capital commitments have ratified the agreement. They estimate that the ESM will come into force in July 2012.
As rocky as the road ahead appears, a recent survey by the Financial Times revealed that most economists still believe the euro zone will survive the year in one piece. Of the 43 that were surveyed, only 17 predicted that the euro zone will break apart in 2012.
Hopefully, when all is said and done at the end of the year, we’ll find the euro zone intact and stronger. Let 2012 be the year that the euro zone got out of its rut because while money can be made, livelihoods are being lost and many more are in peril. So for the sake of our brothers in Europe, let’s hope for the best. Here’s to a good, solid year for the euro zone and the euro! Cheers!