A year ago it was the eurozone that was heading at high speed towards the cliff edge. Fears that Europe’s monetary union was about to break up were commonplace. Spanish, Italian and Greek official borrowing costs were soaring. Mario Draghi, the new European Central Bank president, had ruled out acting as a lender of last resort to governments.
But those who bet on the eurozone’s demise were in for a disappointment. The fact that the eurozone is (reasonably) alive and kicking at the end of 2012, with its 17-strong membership still intact, shows how badly US and UK pundits in particular misread European politics.
Among those who got it wrong, it emerged last week, was John Paulson, who made billions of dollars on the US financial collapse, but whose punt on the eurozone’s structural flaws turned sour.
Seeing so many slip has brought not a little satisfaction at the ECB, at least judging from a speech delivered recently in Frankfurt by Jrg Asmussen, the former German finance ministry official who sits on its executive board (available, alas, only in German, the language of Schadenfreude).
Asmussen recalled the striking confidence with which the euro’s demise had been foreseen. In early December last year, Sharon Bowles, chairman of the European parliament’s economic affairs committee, had warned: "We are potentially facing the demise of the euro by Christmas.” Still more cataclysmic, Asmussen noted, had been UK journalists who predicted riots across Europe.
A first reaction to Asmussen’s comments is that he spoke too soon. Paulson and others may simply have got their timing wrong. European economies and political systems move at slower speeds than trading or investing cycles in London or New York. The eurozone crisis is playing out in slow-motion but the risks ahead are manifold: this week’s reaction in European capitals and financial markets to a possible return to power of Silvio Berlusconi, Italy’s former prime minister, has underscored the fragile mood.
But as Asmussen argued, many commentators took too simplistic a view of the eurozone crisis and overlooked how Europe’s 14-year-old monetary union had not just an economic but a deeply political dimension. Greece’s plight, he said, could not be reduced to just "a few key macroeconomic data such as the deficit, debt level and growth outlook”.
He could have gone further to explore how European Union membership is a bulwark of economic and political stability for ordinary Greeks, many of whom can recall life under a military dictatorship.
Hedge fund managers find Germany's Ordnungspolitik hard to comprehend. But Berlin’s instinct for rules-based systems and disdain for Anglo-Saxon "pragmatism” helps explain its unwillingness to compromise, until it has to.
At the same time outsiders overlooked the extent to which Germans still regard Europe’s economic integration as part of their country’s post-second world war destiny. As 2012 unfolded, it became clear to Angela Merkel, chancellor, and Wolfgang Schuble, her finance minister, that the cost of a Greek exit was simply too high.
Above all, those who a year ago predicted the eurozone’s early demise underestimated the ECB. It was a mistake easily made.
After becoming ECB president in November last year, Draghi was asked if he would do whatever was necessary to keep the eurozone in one piece, including acting as lender of last resort to governments. His answer was a clear no. "The remit of the ECB is maintaining price stability over the medium term,” he said.
By July this year, that position was no longer sustainable, and Draghi pledged to do "whatever it takes” to preserve the monetary union’s integrity. The ECB now stands ready to intervene on an unlimited scale in government bond markets if necessary, to preserve the eurozone’s integrity.
What then can be sensibly predicted for 2013? At the risk of being cited by Asmussen this time next year, 2013 is likely to be fraught. Greece’s finances remain highly fragile. Spain faces a host of challenges. Elections in Italy and Germany could distract politicians. Steps to strengthen the eurozone through banking and fiscal union could be blown off course. It is far from clear that eurozone economies can create the growth necessary to cut soaring unemployment totals – and stave off social unrest or mounting euro-scepticism.
But this correspondent at least forecasts that in 12 months’ time the eurozone will still have 17 members, including Greece.
Ralph Atkins is the FT’s capital markets editor.
Copyright The Financial Times Limited 2012.