the fragility of the eurozone is far greater. The Organisation for Economic Co-operation and Development forecasts a reduction in the underlying fiscal deficit of the eurozone by 1.4 per cent of GDP between 2011 and 2012, against just 0.2 per cent of GDP in the US. Yet the big danger for the eurozone’s weaker economies is that public and private sectors will seek to retrench simultaneously. This is a recipe for deep and prolonged slumps. The uncreditworthy sovereigns are trapped in a probably doomed effort to tighten their fiscal positions in the absence of adequate private sector and external offsets. For these countries, a eurozone-wide recession is a calamity: it must greatly hinder the external adjustment they need. Against this background, the ECB’s offer of cheap three-year financing of banks that might relend to battered sovereigns is little more than a palliative – clever, but inadequate.
The high-income countries have been running a series of fascinating experiments. One was with financial sector deregulation and housing-led growth. It failed. Another was with a strongly interventionist response to the financial crisis of 2008. It worked, more or less. Yet another is with post-crisis deleveraging and a return to more normal fiscal and monetary settings. The jury is out on this effort. In the eurozone, however, this shift to fiscal austerity is running alongside a still bigger experiment: the construction of a currency union around a structurally mercantilist core among countries with negligible fiscal solidarity, fragile banking systems, inflexible economies and divergent competitiveness. Good luck for 2012. Everybody will need it.
