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2012: Make-or-break year for the eurozone

The new year promises to be make or break time for the eurozone, with dramatic integration into a new fiscal union for most and predictions that one ‘small country’ could leave the currency area.

If 2011 went down as the “annus horribilis” for the European Union’s symbol of integration, leaders of Germany, France and debt-laden monetary partners face stark choices as they enter 2012, a decade after euro notes and coins first entered into everyday circulation.

The euro debt crisis could bring all of Europe to its knees, said French President Nicolas Sarkozy in a recent speech reflecting on contagion that spread from Greece through also bailed-out Ireland and Portugal before hitting Spain and finally Italy.

“What kind of Europe will we have left if the euro disappears, if Europe’s economic heart collapses?” he asked.

A radical transformation is under way precisely to avoid that doomsday scenario, one that would eventually blur differences even in tax and welfare systems across the core eurozone economies.

But one also that may not be without an early casualty: for instance, the chairman of the Royal Bank of Scotland, Philip Hampton, expects one “small country” to leave the eurozone in 2012.

His comment, made as Greece was wrapping up painful negotiations over a massive write-down with some of the world’s biggest banks, was echoed by others in the City of London.

At the start of 2011, the troubles in Athens, Dublin and Lisbon were considered “peripheral” problems for the eurozone as a whole.

But that was before infections at the edge of the currency area ate their way into its economic heart — all the way into France and even paymaster Germany, where the threat of a credit rating downgrade or poor take-up on the sale of government bonds served as a major wake-up call.

The crisis has taken many forms since problems first emerged in the United States late in 2007.

It affected mortgage markets, consumer spending and the real economy for householders and businesses with recession, before finally triggering panic over government debt in a Europe whose banks had become overstretched.

While the crisis was at first economic, it soon became political and heads tumbled as in the spectacular case of Italy’s Silvio Berlusconi, while social discontent manifested in the Occupy Wall Street or Indignados protest movements.

Berlusconi was the highest-profile among half a dozen EU leaders who fell to the crisis from Greece to Slovakia, with unelected former EU “technocrats” brought to power in Athens and Rome to restore market confidence.

“There is a risk that public opinion will eventually backfire,” said a senior EU diplomat in Brussels.

The coming 12 months will establish whether the eurozone has the wherewithal to protect Italy or Spain from falling into a financial abyss that could suck in the second eurozone economy, France.

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