This is the year where the most optimistic forecasts are depressing enough let alone the more realistic ones. If all goes well and the euro does not break up, foresee a year of low, if any, growth, a lot of austerity, market rejection of sovereign debt and perhaps social turmoil. If the euro breaks up in two or more separate regions, there will be volatility in both the regions; the weak euro region devaluing as much as possible in the hope of exporting more and the strong euro region affected by a sharp up-valuation of its currency lowering its exports. If some leave the euro then it is hard to tell what the consequences would be. Greece would be the most likely first leaver and its economy would nosedive by up to 30%-plus for two years at least. The other weaker eurozone members may suffer contagion and may have to leave, like it or not.
Of course, in addition to the usual problems, there are elections in France and it is an open question whether Sarkozy will be re-elected. His Socialist rival Fran?ois Hollande is an unknown quantity as he has not held any executive office. He is opposed to the eurozone austerity. What he will do as an alternative is not as yet clear. More dangerous is the third candidate Marine Le Pen. She is from the Far-Right but smarter than her father Jean-Marie Le Pen who beat the Socialist candidate in third place when Chirac ran for his second term. The Left had to hold their noses and vote for Chirac to prevent much worse. Social unrest will help Marine Le Pen since she will blame the immigrants, other EU members and play on French nationalist sentiments.
There is, of course, a presidential election in the US as well. Whoever wins, the logjam in Congress will not end. The American economy is showing better signs of recovery than the European one. On present form, there should be some fall in unemployment percentage by the third quarter. That may help Obama but conventional wisdom is that the American voter does not think about elections until after Labour Day. Thus, whatever the noise level in Republican Primaries and whoever is the candidate, we can take it that the election is unpredictable until very late in the year, say until the middle of October.
Obama?s best hope is that Romney may win the nomination and then the Tea Party fundamentalists will run their own candidate. This is how Clinton won against Bush Senior since Ross Perot took the Republican hardliners? vote away. Had Obama proved more competent than he has done, one would wish for a third party candidate. The only plus for Obama is that in his second term he does not need to compromise. (They used to say about the Indian cricket team in the old days that since it played much better second innings than first why did not they play the second innings first. Of course, now they cannot play in either innings; too busy brushing up their images for the TV commercials, I guess.) American Presidents are the same way in their second term.
Then, of course, we have the change of guard in China. Let us hope the bad old days of revolutionary Maoism are behind us and the changeover will be smooth. The incoming duo will face huge problems of social unrest with the Chinese people finding their voice. But it is unlikely that the economy will falter and, if that is the scenario, there will be time to adjust for the new regime. China is experimenting with making the RMB much more acceptable as an international currency as the recent swap arrangement with Japan showed. If things stay on an even keel, then we should see RMB playing a much bigger role by 2015. But that requires turning away from the export-oriented growth model and much more emphasis on domestic consumer demand.
The joker in the pack is the Middle East, especially Iran. There are already rumblings in the Strait of Hormuz. The US is prodding Iran. Hopefully, this is to keep the Israelis away from any adventure. But, as of now, the probability that something will go wrong in the Iran-Israel nexus is very high. Israel will try and push Obama in an election year holding the Israeli lobby?s power as a threat. America?s clout is receding and the Israelis as well as the Iranians know this. There is some premium on urgency here unless better heads prevail. The EU is in no position to do much as it has its own troubles.
If all that is not bad enough, there is new lad in town in North Korea who may like to play with his nuclear toys.
Happy New Year.
The author is a prominent economist and Labour peer
