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Is this the year that the eurocrisis ends?

The European Central Bank has moved to shore up the euro, investors are more confident, and European leaders are surprisingly upbeat. But critics warn that Europe is not out of the woods.

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“We need wage increases of 5 percent and more this year,” he says. “We need higher pensions and higher welfare payouts. Only if Germany gets more expensive, if it loses competitiveness relative to the other eurozone members, we can fix this fundamental flaw in the construction of the eurozone.”

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Professor Bofinger, like Barroso and many others within the European Union, is also a strong supporter of eurobonds: debt issued and guaranteed by the eurozone as a whole, in a measure that would provide cheap credit for economies like Greece and Portugal – which at the moment cannot raise any money at the financial markets – at the cost of the richer economies. German Chancellor Angela Merkel has repeatedly rejected the idea, arguing that any socializing of debt must be preceded by deeper fiscal and economic integration of the eurozone.

Potential for tumult in 2013

The coming months will see European leaders arguing about the road map for this integration. A banking union, which puts large European banks under the supervision of the ECB, has already been decided on late last year. Now the issue is budgetary control. Before they dish out more money to their poorer neighbors, the richer eurozone members want a say in how that money is being spent. This is certainly true for Germany, where Mrs. Merkel wants to be reelected in September and does not want to be seen as squandering her voters’ taxes.

David Cameron, Britain’s prime minister, is likely to throw wrenches into the works of further European integration. While not a member of the eurozone, Britain holds Europe’s biggest financial market, the City of London. Bowing to pressure of the anti-European faction within his Conservative Party, Mr. Cameron has already announced that he is going to veto amendments to the European treaties necessary for fiscal integration unless Britain gets certain concessions. He is certain to clash with other European leaders, like French President François Hollande, about this special treatment.

And while this wrangling about the powers and competence conceded to Brussels goes on, there’s always the possibility that voters in the southern European countries will lose patience. In Portugal, Barroso's homeland, President Anibal Cavaco Silva used his New Year’s speech to condemn the bailout terms dictated by EU and International Monetary Fund (IMF) as “social injustice” which led to a “vicious circle of economic decline and a reduction of tax revenue.”

Cyprus will be the next eurozone member to receive financial aid (after Greece, Portugal and Ireland), and Greece may have to ask for a third bailout. In Italy, where the “cabinet of technocrats,” unelected financial experts led by former ECB banker Mario Monti, managed to keep the economy afloat, general elections in February could bring new uncertainty about the country’s prospects.

But the real worry, according to German economist Lars Feld of Freiburg University, is France.

“They haven’t done anything to increase their competitiveness,” says Mr. Feld, “yet is the country that works the least among eurozone members each year.”

German officials in the past few months did not hide their disappointment in what they perceive as an ineffective response to the crisis by Mr. Hollande. With negative growth predicted for most of Europe in 2013, it would be a major blow if the eurozone’s second economy were to stumble.


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