Sadly, the eurozone’s uncertain future will continue to cast a huge shadow over the global economy next year. Surely there are other concerns, including the risk of a not-so-soft landing in China, of pre-electoral paralysis in the US, and of a large, unexpected geopolitical shock. Even in the most benign scenario, the massive overhang of global public and private debt will hinder any robust recovery in the advanced economies. But the eurozone remains far and away the greatest source of vulnerability.
There is no easy solution. The eurozone needs a new constitution that creates powerful, centralised fiscal and regulatory authorities, with corresponding political integration. Substantially greater integration probably means ousting some of the less developed states until they are sufficiently economically advanced. Unfortunately, such a course is politically unacceptable, not least to France, a core member.
Therefore the only realistic medium-term solution is an expansive interpretation of the European’s Central Bank’s charter, ideally prefaced by a huge restructuring of public and or private debt in several periphery countries. The ECB is understandably nervous of losing vast sums by pouring money into a leaky bucket, especially without an automatic fiscal backstop vast enough to absorb losses. Germany, in turn, is understandably worried about having to pay a disproportionate share of any future recapitalisation, not to mention about being gamed into tolerating much higher inflation as a back-door solution.