Eurozone 2013: Where to?

Angela Merkel, German Federal Chancellor, Mario Monti, Italian Prime Minister; Minister for Economy and Finance ad interim, and José Manuel Barroso (from right to left)

In 2012, Eurozone not only managed to effectively counter its double-faced, credit and sovereign debt crisis, but also convinced the global financial community, that the single European currency is probably the safest deposit of value. The world responded positively by voting the euro at the region of 132 American cents. A fair price, to keep exports of good and purchases of foreign assets at balance.What happened in 2012

A combination of extraordinary but conservative and well organised interventions in the monetary markets by the European Central Bank to support liquidity in the capital markets and the banks and an advanced institutional strengthening of Eurozone, with the introduction of the draconian Fiscal Agreement as from 1 January 2013, the 17 member states of the Economic and Monetary Union of the EU reassured the world of their utmost decisiveness, to guard their unity and their money intact.

And the global community believed them.The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (popularly known as the “fiscal compact”) entered into force on 1 January 2013 following its ratification by Finland. The treaty aims to strengthen fiscal discipline in the euro area through the “balanced budget rule” and the automatic correction mechanism.

For the treaty to enter into force, it had to be ratified by 12 euro area member states. According to an announcement by the European Council this condition was met when Finland, the twelfth euro area member state to ratify the treaty, deposited its instrument of ratification on 21 December 2012.

“The treaty will be legally binding as an international agreement and will be open to EU countries which did not sign it at the outset. The treaty was conceived following the decision by euro area leaders in December 2011 that stronger measures were needed to reinforce stability in the euro area. It was signed on 2 March 2012 by 25 EU countries”, at the exemption of Britain, and the Czech Republic.

The two most powerful instruments of the new EU Treaty are the European Stability Mechanism (ESM), which is to support member states in honoring their financial obligations and the Balanced Budget Rule, that forbids and severely punishes national structural fiscal deficits above the 0.5% of the GDP limit.

On top of that the 17 Eurozone countries also agreed to create a unified banking volume in the single money zone, where the ECB will monitor and control the major banking groups and prevent them from accommodating their national governments’ excessive borrowing.

Armed with all those new policy instruments, the Eurozone has not only confirmed its decisiveness to avoid in the future and resolve the present credit crisis in a number of member states, but to create a politically tight Economic and Financial Union. The solidarity shown to Greece and Spain was a first sign that the Eurozone in one and seamless economic and political space.

What brings 2013?

The Eurozone however is far from having resolved its problems. The entire single money zone was in technical recession during the last two quarters of 2012 and expected to continue on the same path in the first three-month of 2013. The only country that has escaped from this misery is Germany, always powered by its exports. The fact that during 2012 the automotive industry sold more cars that in any other year, is a very positive sign for the largest economy of Eurozone.

This means that the parity between the euro and the dollar, currently around 1:1.32, will continue to prevail throughout the New Year 2013. The two currencies will predictably continue behaving the same way as during the last month of 2012. Of course given that the US escapes the “fiscal cliff”. Nobody wants to thinks what may become of our Atlantic economic volume, if it doesn’t.

As for the capital markets a conservative prediction is that, given the that the major European banks are now in a much better shape than six months ago, sitting on strong liquidity decks, stocks are bound to have better prospects than last year.

The political horizon

In any case a lot will depend on the political horizon over the Eurozone, with the key being hidden in Italy. If the forthcoming early legislative elections will not lead to the formation of a viable government, preferably with Mario Monti in it, the country and the Eurozone will have unpredictable difficulties in convincing bond markets that the huge Italian debt can be refinanced.

If the Roman knot is settled however, Eurozone does not seem to have any other pending major political confrontation on its agenda, which could derail its course. Whatever the outcome in the German legislative elections, scheduled for September 2013, there will be no major change in Berlin‘s policies towards the Eurozone and the world.

All in all, the general outlook of Eurozone for the New Year may not be rosy, but it is not dark either. The major part of the cost of the double crisis has already been cashed by Athens and Madrid.