What will 2012 bring for Europe? It's been a common discussion point over the festive period, eliciting very different points of view.
At a recent dinner in London, an asset manager confided he was planning to keep a wad of cash in his house, to prepare for what he believed was the imminent collapse of the euro.
At the other extreme, a taxi driver in Germany — a nation yet to feel the full force of the crisis — looked as though there was something wrong with me when I asked if he would be cutting back his spending over Christmas this year. What possible reason could there be to do that?
At an academic level, too, the discussion seems to have taken off in two dramatically different directions.
There are those who believe that the fault lines the Euro Zone crisis has revealed — namely that a monetary union cannot work without fiscal and political integration — will force nations towards a far deeper union: A European version of the US constitutional convention of 1787, which brought together the bickering 13 states; the creation of a mighty United States of Europe.
Then there are the doomsdayers who believe that 2012 could see the collapse of the Euro Zone and a return to drachma, pesos and Deutschemark, exactly a decade after the single currency first entered circulation.
In a recent article, NYU professor Mr Nouriel Roubini warned that the “endgame” of the Euro Zone had begun, and that its disintegration would follow restructurings of sovereign debts, and exits from the union. In Britain, the Bank of England has urged banks to make contingency plans.
UNCERTAIN FUTURE
On the side of the optimists were the developments at a December summit, where European leaders hashed out plans for deeper fiscal union sealed by a treaty, with a March deadline.
A draft of the treaty is circulating, which its authors claim could come into force after being ratified by just nine governments.
It goes some way towards meeting those hopes of fiscal union, by imposing tough new fiscal requirements on governments, including penalties should they fall short.
Britain's decision to veto the agreement has forced leaders to forge an inter-governmental agreement, rather than an EU one, but this could actually speed up its implementation. Besides, important pillars of the EU have been brought about through unconventional routes — such as the Schengen agreement on border controls.
At the same time, there are doubts about whether leaders will pull the deal through (there are, for one, some questions about its constitutionality), and whether it will be enough.
2011 wasn't exactly a glorious year for decisiveness in Europe, and though it could be argued that this was inevitable given the weight of the decisions that had to be made, events simply outpaced them.
With many billions of sovereign debt maturing in some of the region's most vulnerable nations (Spain and Italy will have to refinance large amounts of debt at the end of January), not to mention the threat of a downgrade to even the credit rating of Germany, there's the danger that events could spiral out of control.
There are also political risks: the Greek election is due to take place in February, while French elections in April and May could lead to the victory of socialist candidate, Mr Francois Hollande, who is far less keen on austerity than Mr Nicolas Sarkozy is.
FINANCIAL SUPPORT
Yet, there's one big reason to believe the union will endure: the sheer political will to do so.
German Chancellor Ms Angela Merkel — whose views matter more than any other individual in all of this — has made it plain it's a road she's unwilling to go down and that if the euro fails the whole European project does, too. And that Europe, which has emerged as a world power from the battered and bloody remnants of two World Wars, is something no one wants to let go of.
As a recent Credit Suisse paper on the Euro Zone crisis notes, “Several times this year, European politicians were faced with the options of choosing either closer fiscal integration or financial disintegration … each time they chose the former.”
The stronger member states may be sick of the baggage the weaker ones have lumbered them with, but recognise that far more disastrous, both on a political level and an economic level, would be the death of the Euro Zone. (Germany, for one, would see a massive increase in the valuation of the Deutschemark, with dire consequences for its exports).
Crisis-fighting power will come in part from the European Financial Stability Facility, the temporary ¤440 billion fund created to help distressed nations and help with bank recapitalisations, and its more permanent successor, the European Stability Mechanism, due to come in place by June 2012.
Governments are expected to boost its lending capacity further, while support via the International Monetary Fund will add to the firepower.
Expect the European Central Bank, which has stood somewhat in the shadows so far, to play a major role in 2012. Deutsche Bank analysts describe its rising role in the fire-fighting of 2012 as “inevitable.” The central bank operates under certain constitutional constraints from Article 123 of the Lisbon Treaty, which formed the EU, that prevent it from providing primary financing to governments (it has been buying government bonds on an ad hoc basis on the secondary market).
The Governor, Mr Mario Draghi, has stuck firmly to the limits on what the ECB is able to do, though his insistence that the euro is “irreversible” is a comfort to many.
The recent ECB decision to create a three-year liquidity scheme for private banks, its biggest ever lending operation, with looser collateral rules to boot, and from which banks have borrowed a total of ¤489 billion, is seen as a clear stepping up of its role.
FISCAL DISCIPLINE
Goldman Sachs's Mr Jim O'Neill described that recent development as “very significant” and predicts that it should play “a vital role in preventing financial contagion.”
Many also expect the bank to step up its purchases of short and long-term government bonds.
Whether it could go all the way — acting as a lender of last resort by pledging to buy up debt from troubled countries, or through the issue of joint euro bonds — remains one of the big uncertainties.
But the fact that greater fiscal discipline and integration is on the cards, and that countries led by Italy are pressing ahead with credible austerity drives, means that even the most resistant to joint liability and the risk of moral hazard, such as Ms Merkel could be swayed towards making the necessary treaty changes.
2012 won't be a pretty year: Some are preparing for a Greek default, within the euro. Most economists are expecting a contraction, some as deep as 1.5 per cent across the region, as austerity measures limit growth, while euro devaluation increases inflationary pressure in the short-term.
2012 is unlikely to be the year either of a Disney-esque clear-cut resolution, or a blockbuster-style collapse, but another one of muddling along through the crisis.