The European debt crisis will dominate 2012. Forget resolutions: leaders will take the embattled eurozone to the edge of the political and economic abyss before deciding to resolve the crisis.
There will be familiarity to start with: markets will rise towards the first summit , scheduled for the end of January, and plunge again in the aftermath of indecision.
The big questions will remain the same: where’s the financial backstop (ECB?) ; where’s a proper firewall (EFSF?); and how to create a fiscal union from countries as different as Greece and Germany?
While the leaders wrangle without resolution, sovereign states will crack on. Spain and Italy will reassure markets with their tough austerity plans but on the streets they will face dangerous civil unrest.
It will be the revolts, a sort of Mediterranean Spring, rather than the continued financial traumas, that will eventually goad leaders into action.
Angela Merkel will have to relent and agree to the European Central Bank being unleashed. She (SNP: ^SHEY - news) will be forced to allow quantitative easing and for the ECB to be the lender of last resort. She will be forced out of office as Germany’s cherished inflation rises.
Despite France losing its AAA credit rating briefly , Sarkozy will hang on and will be the posterboy of the recovery. The real brains behind the operation will be Mario Draghi, the boss of the ECB.
But if this doesn’t happen and the leaders fail to act, by the end of the year, the Americans will lose their patience and intervene instead.
In a scorched-earth approach, the Fed will swoop and buy $1 trillion of bonds, stabilise markets - and own Europe (Chicago Options: ^REURUSD - news) .
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