December 28th, 2011
06:19 PM GMT
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London (CNN) – Want to know what should be on Europe’s wish list if it wants its common currency to survive beyond 2012? Ask a leading economist.

As a top economist at Barclays Capital, Julian Callow has formulated his own battle plan - but one which can only work if Europe is willing to get behind united political goals.

“We are still talking about a group of country states which have this common currency, but what the markets really want to see is a clear, decisive plan to move to a political union for the eurozone,” Callow told CNN.

His 2012 check-list includes serious commitment from governments to balance their budgets, a weak euro and a more proactive European Central Bank.

But while these factors could signal to the markets that Europe is serious about political union, there are still likely to be doubts that the continent’s differing economies and priorities can ever come together as a United States of Europe.

Certainly, a March 2012 date set by German Chancellor Angela Merkel and French President Nicolas Sarkozy for a revamped EU Treaty seems wildly ambitious.

Callow agrees. “Look at how many years it took to create the American Constitution,” he said.

Part of the problem, of course, is that each key eurozone player has its own wish list.

Germany wants an austerity union with minimal government borrowing, everyone playing by the rules and heavy sanctions against those who break them.

France wants a system where individual countries have control of things at a national level.

Spain and Italy will have different issues, and smaller countries will want to make sure that they are represented at European level to varying extents.

Add the 2012 French presidential elections into the mix and the picture gets even more complicated.

Amid this push and pull, it will fall to the ECB to keep the markets happy – a duty Callow says it must try harder to fulfill.

Further, Italy, in particular, should be making use of the IMF facility to eliminate doubts over its finances, he said. “If it had some precautionary credit line, this would give the markets more confidence in Italian debt,” he added.

That brings us to Callow’s most important wish for 2012: Fix Italy.

“If you can solve Italy, if you can dampen the concern that markets have, then I believe the concerns will dissipate significantly elsewhere,” he said.

Focus on Italy seems inevitable, since the markets are already resigned to losses over Greece and are now shifting attention to other countries with towering debt problems, namely Italy, Portugal, Ireland and Spain.

“The markets are saying they are not 100% confident that some of these countries are fiscally solvent and that is why so much of the task of policymakers and governments is to reassure the market,” Callow said.

Italy, according to Callow, can do this by making a firm commitment to a new austerity plan.

At the same time, Spain has the opportunity to cut its deficit and introduce plans to consolidate its banking sector.

Portugal and Ireland, meanwhile, are small enough to be covered by IMF programs and European lending.

In short, in 2012 and beyond, the eurozone will need a better set of rules to make the whole system function. For now the focus is on financial austerity and restoring the appearance of solvency in the eyes of investors.

The bigger challenge is for governments to show they are deadly serious about achieving balanced budgets and implementing tough policies to promote growth.

Only then will the markets really believe Europe’s own long-term wish for political union will one day be granted.



soundoff (10 Responses)
  1. Zizenn

    Year 2012 can just be as eventful as 2011, yet it could turn out to be more (perhaps extremely) dreadful in many areas and ways. For one, to cover up dying economy, the powerful may start to wage bigger wars to create chaos to divert the focus of everybody.

    December 29, 2011 at 4:42 am |
  2. arthur uzo

    Why are they fighting?

    December 29, 2011 at 4:16 pm |
  3. An American

    arthur uzo This is called: discussing.

    December 29, 2011 at 4:29 pm |
  4. bernardwsley

    Oh, get a room already.

    December 29, 2011 at 6:58 pm |
  5. Bright

    ...people understand something....Europe is cleaning up the kaka the hardway through austerity...it hurts...but as they say...no pain no gain! The USA and UK are doing it different...they turn on the money making machine and voilá a pain free short term morphine injection...will see in a few years time who baked the best cake...all the best...to all of us!

    December 30, 2011 at 12:35 am |
  6. Paul Johnston, PhD Economics

    THE EURO ZONE HAS BEEN DEAD FOR A LONG TIME - NO PERSON IN HIS RIGHT MIND WANTS ANYTHING TO DO WITH IT BECAUSE IT IS A HUGE INVESTOR RISK - MERKEL AND SARKOZY ARE PROPPING UP A DEAD HORSE JUST TO SAVE THEIR OWN BANKS BEFORE IT ALL GOES DOWN IN 2012 - GET OUT OF IT WHILE YOU CAN!

    December 30, 2011 at 6:23 am |
  7. eun young

    January 1, 2012 at 2:44 pm |
  8. eun young

    January 1, 2012 at 2:45 pm |
  9. Pharmc945

    Very nice site!

    January 17, 2012 at 1:08 pm |
  10. Pharme540

    Very nice site!

    January 17, 2012 at 1:26 pm |

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