The best thing about 2011 was that it was likely
better than 2012, someone recently quipped. By the
same token, while there has been much concern about
the US’s political gridlock, something worse for the
world, could have happened. Rightists could have
prevailed in their programme of
austerity-cum-redistribution to the wealthy.
Automatic cuts will not happen until 2013, which
means that the economy in 2012 will be spared, ever
Two more positive notes for 2011: the United States
seems finally to have awakened to the yawning gap
between the rich and the rest, between the top one
per cent and everyone else, and something is very
wrong with the capitalist system, youth-led protest
movements, from the Arab Spring to the Spanish
Indignados, and the Occupy Wall Streeters, have made
The likelihood, though, is that the economic and
political problems that were so manifest in the US
and Europe in 2011, which have so far been
tremendously mismanaged, will only grow worse in
2012. Any forecast for the coming year depends, more
than usual, on politics. Economic forecasts are
difficult enough, but when it comes to political
forecasts, the crystal balls are even cloudier. That
said, here are the best guesses.
European leaders repeatedly proclaim their
commitment to saving the euro, but those who could
are committed to not doing what is needed, they have
repeatedly said. Austerity will mean slower growth,
indeed, a recession is increasingly likely, and,
without growth, distressed countries will not be
able to manage their debts, they have recognised.
But, they have done nothing to promote growth. They
are on a death spiral.
The only thing saving the euro in the short-term is
the European Central Bank’s (ECB) purchases of
sovereign bonds, which have kept interest rates from
soaring. Like it or not, the ECB is effectively
financing the sovereigns. German leaders have
frowned on this, and the ECB has felt uncomfortable,
limiting its purchases and saying that political
leaders, not central bankers, should save the euro.
But, the political response has been too little, too
late, to say the least. The most likely scenario is
more of the same: austerity, weaker economies, more
unemployment, and continuing deficits, with European
leaders doing the minimum to fend off crisis for the
moment. In short: more turmoil.
The day of reckoning, when the euro breaks up or
Europe takes the kind of definitive action that
would make a single currency work, may come in 2012,
but, more likely than not, Europe’s leaders will do
whatever they can to postpone that day of reckoning.
Europe will suffer, and so will the rest of the
The US had hoped for an export-led recovery, but,
with economic growth slowing in Europe, its largest
customer, and impeding growth in much of the rest of
the world, that is unlikely. With the worst effects
of spending cuts potentially still to come, gridlock
and spite may mean that the current administration
in the US will not extend payroll-tax cut, weakening
That, combined with cutbacks at the state and local
level, means that the first real manifestations of
austerity’s impact will appear in 2012. Already,
though, public employment is around 700,000, below
its pre-crisis level. Government, rather than acting
counter-cyclically, offsetting weak private demand,
has been acting pro-cyclically, exacerbating the
economy’s problems. Meanwhile, the consequences of
the failure to deal with the housing crisis, which
triggered the financial markets’ near-meltdown in
2008, are continuing to be felt: further decline in
real-estate prices, more foreclosures, and, thus,
even greater stress on US households.
No one in US politics seems willing to face the fact
that fixing the banking system, though necessary,
was not sufficient to restore the economy to health
or that the financial system was never really fixed.
The US economy before the crisis was being
maintained on artificial life support by a housing
bubble that led to unsustainable consumption. There
is no way back to 2007.
But, neither party has been willing to admit what is
really wrong or advance an agenda that would address
the underlying ills. Platitudes and placebos, vapid
calls for more job creation, fiscal restraint, and
reining in entitlement programmes will characterise
the upcoming election year. Neither side will step
forward with a programme for restructuring the
economy and reducing the inequality that is sapping
the country’s strength.
Political leaders are not up to the task. If
investors suffered from irrational exuberance in the
1990s, they are likely to suffer from rational
pessimism in the coming year. After all, the US will
have to choose between a leader who has proven that
he cannot lead it out of an economic morass and one
who has not yet proven his inability to do so, but
who could make matters even worse through policies
that increase inequality and slow growth.
It is hoped that events could prove the narrative
wrong and that the pessimism turns out to have been
excessive. But, the risks are more on the downside.
Indeed, 2012 could prove to be the year in which the
experiment with the euro, the culmination of a
50-year process of economic and political
integration in Europe, comes to an end.
In that case, rather than bringing the hoped-for end
of the Great Recession of 2008, a downturn that has
lasted too long and caused too much suffering, 2012
may mark the beginning of a new and more frightening
phase of the world’s worst economic calamity in
three-quarters of a century.