Review of the eurozone in 2012: A crisis of debt and identity

'It was the year the world was plunged into an economic ice-age'

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The Independent Online

To the discomfort of great financial brains such as George Soros or Boris Johnson, the euro has survived another year.

This was the year when the euro was finally doomed; when eurozone governments could no longer "kick the can down the road" at "last-chance summits". It was the year when the markets would finally foreclose on Greece, Spain and Italy.

It was the year when the contradictions at the heart of the euro – a single currency without a single economy or a single political purpose or even a proper central bank – would rip apart the whole project and plunge the world into an economic ice-age.

In June, Mr Soros said that the euro had "only days to live". Surprise, surprise, the euro is still here. It remains quite strong against the dollar and the pound on financial markets. Eurozone governments have proved that, yes, they can kick cans down roads.

In 2012, the new European Central Bank governor, Mario Draghi – candidate for European Hero of the Year – discovered that Frankfurt had hitherto unsuspected, independent powers to bail out floundering eurozone banks and nations. In other words, the ECB now claims the right to a form of the Quantitative Easing (or open-ended printing of money) deployed by the Bank of England and Federal Reserve to keep the British and American economies afloat since 2008.

Since the beginning of the eurozone crisis in 2010, markets have been pushing two ways. There are some investors who believe that it is a smart idea to shove all of us over a cliff and pick our pockets on the way down. There are some who feel this is not such a good plan.

Mr Draghi's innovations have helped the second to win the battle against the first, for now. He has given financial markets a reason not to destroy the euro and cripple the world economy. He has given eurozone governments a breathing space.

The longer-term questions remain unanswered: can the euro survive? Does it make sense?

In 2012, eurozone governments have pushed ahead with their fiscal pact, which forbids them to build up large new debt mountains in the future. They are still examining ways of creating an "economic government" for euroland. This would, in theory, give the eurozone a single political direction. It would not immediately bridge the gulf between, say, the German and Spanish economies; or even the growing competitive gap between the German and French economies.

The crisis in the eurozone is more than just a crisis of debt. It is a crisis of diverging economic models within one currency zone – something that goes well beyond the differences that also exist between, say, Mississippi and Connecticut in the 'dollarzone" or between Country Durham and Surrey in the 'poundzone'.

The eurozone crisis is also an existential crisis: a crisis of identity. Having created a single currency without the political machinery to make it work, how far are eurozone countries prepared to dissolve national decision-making into a de facto federal government to run, and create, a single economy? What democratic legitimacy would such a "European government" have?

Another event in 2012 rearranged the three-dimensional chess-board of eurozone politics: the change of government in France. President François Hollande came to power in May saying that he would shift the game away from "all-austerity" and towards "growth with discipline".

President Hollande has marginally amended EU policy in this direction. In return, to the fury of his own left-wingers, he signed up at the "last-chance summit" in Brussels in June for the Angela Merkel-inspired deficit-squeezing fiscal pact.

As the year ends, huge differences remain between Paris and Berlin – perhaps greater than at any time since the EU (née EEC) was founded.

Paris speaks of solving the crisis though "solidarity" between eurozone countries. It has become the de facto leader of a "southern" bloc which wants the Germans and other rich northerners to use their relative prosperity to reflate the whole European economy.

Berlin speaks of solving the crisis through a single European government which would, implicitly, impose a German approach to fiscal discipline and economic competitiveness.

The French – both Right and Left – reject the idea of an all-powerful, federal government for the eurozone. Final decision-making on taxing and spending and labour policy (the 35-hour week) must remain with national governments.

Berlin may be right economically but it is wrong politically and democratically. There is no popular support for a fully federal eurozone, not in Germany, not in France, not anywhere. There is no obvious way that such a government could be democratically elected or controlled.

Paris may by right politically and democratically but it is on weak ground economically. The French version of "eurozone governance lite" would, at worst, be an amended version of the present, can-kicking muddle. It would be unlikely to persuade the markets that solid, new foundations have been constructed under the eurozone.

The years go by. The euro is still with us. So is the crisis.

@peston Hollande + Merkel = Homer. Merkel + Hollande = Merde

Robert Peston, BBC Business Editor

@DMiliband Greek election result far more "dangerous" than Francois Hollande

David Miliband, Labour MP for South Shields

@chris_coltrane I'm a firm Eurosceptic. I don't even think Europe exists. Has anyone actually ever *been* there? Not that I know of. It's a pack of lies

Chris Coltrane, comedian

@Owen Jones84 The Euro-zone is plunged back into re-cession. Aus-terity has sucked out growth, demand and jobs, and devastated millions of lives

Owen Jones, columnist for The Independent and i

@nigel_farage I think the EU flag should fly over the Palace of Westminster. That would at least reflect what is going on

Nigel Farage, UKIP leader

@faisalislam And the €zone officially NOT in technical recession. But we in UK officially are. But its the €zone's fault that we are in recession # logic

Faisal Islam, Channel 4 News Economics Editor