Euro survives 2012, further tests in store

The battered euro, written off as a dud many times during a crisis-wracked year, appears to have survived 2012, but 2013 could prove just as difficult if the economy continues to struggle. It finished the year strongly after the 17 eurozone nations earlier this month nailed down a deal to supply long-delayed bailout funds to Greece to keep the country afloat, and the bloc intact. Athens in turn delivered on its part of the bargain -- more stinging austerity, economic reforms and a tight budget  all with the aim of cutting its massive debt burden to a more sustainable 124 percent of GDP by 2020. Then progress towards tighter economic and fiscal coordination in the eurozone, and a key first step towards a shared bank supervision regime, rounded out the gains, leaving the Europe in much better shape than seemed likely at the beginning of the year. "Many observers felt it was all over for Greece (and its) ... remaining in the eurozone. As year-end approaches, we know that these Casandras were wrong," EU Economics Commissioner Olli Rehn said. For many months, all analysts could talk about was Greece's likely exit from the eurozone and what it would mean for the bloc's future. Now, "the likelihood of a member state leaving the eurozone is gone," said Janis Emmanouilidis of the European Policy Centre (EPC) think-tank. Reflecting the change, Standard and Poor's raised Greece's sovereign debt rating by a massive six notches because of what it termed the "strong determination of ... (eurozone) member states to preserve Greek membership." Greek Finance Minister Yannis Stournaras said the decision "was a very important one that created a climate of optimism. But we know that the road is still long and hard, the hour is not one for easing up." Analysts also highlighted agreement on the eurozone's Single Supervisory Mechanism (SSM) to regulate its banks, a first step in ring-fencing lenders who get into trouble and threaten financial disaster. Perhaps the key breakthrough, giving purpose and backing to the other reforms, was a commitment by European Central Bank head Mario Draghi over the summer months to do anything necessary to save the euro. In September, Draghi said the ECB would buy up the sovereign debt of any eurozone member state without limit, if that is what it took to keep the financial markets in check. This pledge of 'Outright Monetary Transactions' meant markets' could no longer enjoy a one-way bet against a member state as the ECB could step in on its side. The immediate result was a sharp easing in borrowing costs, especially for Spain and Italy which had been tipped to follow Greece, Ireland and Portugal in needing a bailout. That change, backed up a 100 billion euros eurozone lifeline for its banks, allowed the Spanish government to hold the line. By year-end, few were talking of Madrid as the next debt crisis casualty, with its banks also being stabilised at a much lower-than-expected cost of some 40 billion euros. Some analysts said it was important not to get too carried away, however. The outlook for the next two years "looks less unsettled and will be concerned above all with implementing the new supervisory regime and winding up mechanism for the banks," CM-CIC Securities analysts said in a note. For Barclays, talks on closer integration in the eurozone could prove heated and even chaotic, with the emergence of deep differences running the risk of stoking fresh tensions on the markets. Above all, the uncertainties for the coming year are political, with elections due in Italy and then Germany, while the situation in "Greece is still on a knife-edge," said Emmanouilidis at the EPC. The economic outlook is also clouded, with the eurozone in recession and expected to slow further while unemployment runs at a record 11.7 percent, rising to unprecedented levels around 25 percent in Spain and Greece. Against that background, German Chancellor Merkel's guarded words on the outlook seem appropriate. "We have already achieved a lot but I think we still have a very difficult time ahead," Merkel said after the last EU leaders summit of the year earlier this month.