Brussels - After two years of turmoil that has shattered
confidence in the economics and politics of European monetary union, it would
be rash in the extreme to suggest an end is in sight.
But through the pall of gloom that has hung over Brussels
for months, vague whispers can now be heard in the corridors about a corner
possibly being turned if several tricky elements come together in the months
At this point they are purely speculative musings, laden
with multiple ifs. And it remains far easier to list all the potential pitfalls
and obstacles that lie ahead than it does to identify the possible bright
But the combination of the European Central Bank's provision
of three-year liquidity for banks averting a credit crunch, the fact yields on
Italian and Spanish 10-year bonds have fallen, the first steps towards deeper
euro zone fiscal integration and the pure fatigue in markets after such a long
period of all-consuming crisis may point to some relief ahead.
Mark Mobius, the Franklin Templeton fund manager known as
something of a contrarian, went as far last week as to put a date on an end to
the mayhem. That was stepping out on a limb, but it suggests that those
attempting to take the pulse of the crisis may be beginning to shift their
"The European crisis isn't as deep and terrible as
people think," Mobius, who oversees $50bn in emerging market investments,
told Brazil's Valor Economico newspaper, saying he expected Europe's crisis to
be over by June 2012.
"Nations there are in a process of negotiations and
that takes time," he said.
European policymakers are not as bold as that. They have
learnt over the past two years just how dangerous it is to make overly positive
But the progress in getting 26 of the EU's 27 countries to
back tighter fiscal rules for the eurozone - Britain remains outside - and the
fact Mario Draghi, the ECB president, is positive about what is being called a
new "fiscal compact" has given some officials room to feel slightly
If the unlimited three-year liquidity that the ECB offered
this week - of which banks snapped up €489bn - can help unfreeze lending, if
Portugal, Ireland and Italy can stay on top of their structural reforms and
Spain keeps up its efforts too, if eurozone leaders can finally put together a
meaningful firewall against the crisis using their bailout funds and help from
the IMF, and a frightening amount of government debt refinancing early in the
year is overcome, then...
"If we manage the first 6 months of 2012 without major
accident things will look better," one senior euro zone policymaker told
That is the tentative on-record view too.
"The path is long, longer than we expected,"
Herman Van Rompuy, the president of the European Council and the chairman of EU
summits, said in a video message this week.
"But let there be no doubt, there is a fundamental
political will to move forward as a union. We have a moral duty to continue
this mission," he said, announcing that EU leaders would next meet on
January 30 for their 17th crisis-fighting summit, this time to focus on a
One notable improvement in sentiment is the fact that
diplomats and EU officials no longer speak quite so freely about the break-up
of the eurozone, a possibility that was on everyone's lips only two months ago.
While Greece - the crucible of the debt crisis - remains a
serious concern, and the chairman of Royal Bank of Scotland said on Thursday he
thought a small country could still leave the eurozone, the commitment to new
fiscal rules has created a renewed sense of unity.
The first top-level meeting to work on the details of the
fiscal compact - which EU leaders hope to be in force by March - was held this
week and was a chaotic affair, diplomats said, with clear tension between eurozone and non-eurozone countries.
But there appears to be a genuine desire to keep the 17 eurozone members and 9 non-euro countries in lockstep in pushing for stricter
budget deficit and debt rules, and intense efforts are being made on all sides
to get Britain to join up too, with Berlin and Brussels keen for London's buy-in.
"If you look at the intergovernmental agreement, I
don't see why it can't be extended to 27 countries and integrated back into the
EU fold," said one eurozone diplomat, referring to the fiscal compact and
the need to get Britain onboard.
"It's going to be a very delicate dance and there's no
certainty that it will come off, but there are efforts being made on all sides
and it would be a good beginning to 2012 if a way could be found to get the
agreement at 27, not 26 and 1."
Firewalls and France
The other big question mark hangs over the firewall needed
to ward off market attacks on weak eurozone debtors.
At the moment the eurozone has the European Financial
Stability Facility, a €440bn fund that has so far been used to bail out Ireland
and Portugal and will be used to provide assistance to Greece under its second
The EFSF is scheduled to be replaced by the European
Stability Mechanism, a permanent crisis-resolution fund, in July next year,
although final details concerning the structure and functioning of the facility
remain to be agreed.
If the ESM, which will have a capacity of €500bn, comes into
force in July and agreement can be reached on giving it a banking licence as
France wants - a big if - then it is possible that the positive political
undertones of the fiscal drive will be underpinned by stronger financial
By then it is also possible that a way will have been found
to release €150bn from eurozone central banks to the IMF to bolster its
arsenal, with the possibility of up to €50bn more from other European countries
- Russia, India and others.
That would bolster the IMF's resources, potentially allowing
it to lend money back to needy eurozone member states with IMF terms and
conditions attached. But again, there remain more doubts than certainties about
whether the plan can work.
"We're working on a multi-pronged strategy that brings
together a new fiscal framework, more intense political commitments and a
bigger firewall," said a senior EU official directly involved with
tackling the crisis.
"I'm not saying we're there yet, but we've got the
right materials in place now. We just need to build it."
While positive murmurings are audible, no one wants to put
too bright a view on the outlook. There are at least two very dark clouds
hanging in the middle distance: the state of the eurozone economy and French
Expectations are that the eurozone will slide into recession
in the first quarter of next year, making it even harder for struggling
countries to get their finances in order.
And President Nicolas Sarkozy faces an electoral test the
polls suggest he will fail.
How he handles policy in the run-up to the April 22
election, what happens to France's triple-A credit rating before then, and how
Paris and Berlin - the powerhouses of the eurozone - deal with their
differences, may determine the region's future.
Francois Hollande, the Socialist candidate who is ahead in
the polls, has already vowed to renegotiate the terms of the EU treaty deal if
he is elected to include a stronger role for the ECB and the creation of joint
eurozone bonds - both red lines for the Germans which could strain their
However, with Hollande's popularity slipping, the electoral
outcome is far from certain.
"France and Germany are like two big rams locked in one
another's horns," said the eurozone diplomat, emphasising that how Sarkozy
and Chancellor Angela Merkel interact and play off each other was perhaps the
biggest imponderable of 2012.