Economics, International economy, Pethokoukis

The coast is not clear: 3 big potential problems for the EU next year

Image Credit: Yanni Koutsomitis (Flickr) (CC BY 2.0)

Image Credit: Yanni Koutsomitis (Flickr) (CC BY 2.0)

For the EU, it was a year of recession and rising unemployment. But at least the whole magilla didn’t implode, thanks to a) ECB boss Maria Draghi’s commitment to buy Italian and Spanish bonds, and b) Angela Merkel’s clear commitment to keep Greece in the EU.

But what about 2013? AEI’s Desmond Lachman sees problems ahead:

The markets are choosing to ignore the likely further deepening in the European economic recession and the consequent further political deterioration in the periphery that seems to be in store for Europe next year.

Instead they are pinning their hopes on Mrs. Merkel’s resolve to do whatever it takes to hold the Euro together at least until after the September 2013 elections are out of the way. They are also banking on Mario Draghi making good on his commitment to have the ECB buy as many Italian and Spanish bonds as might be necessary to keep interest rates for those countries at reasonable levels.

Sadly, there are all too many ways that the market’s present complacency about Europe’s economic and political prospects could prove to be ill-founded.

1. A fall in Greece’s shaky coalition government would almost certainly result in Greece defaulting on its official loan commitments, which would all too likely set the stage for Greece’s exit from the Euro.

2. Similarly a growing anti-austerity backlash and regional problems in Spain could make it very difficult for Mariano Rajoy’s government to request ESM financial support, which is a necessary condition for the ECB to buy Spanish government bonds.

3. And then there is always the prospect that a deepening economic recession in Italy and Portugal will heighten political instability in those countries.

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