We've learned many things about the eurozone over the three years the debt crisis has been unfolding. Every solution' seems to unravel quickly. There's always another country getting into trouble as soon as one gets fixed. And the final summit' rapidly gets followed by another one.
But we have also learned this; it doesn't like elections much, because they provoke a crisis. We've already seen it in Greece, where electors threw out the parties associated with punishing austerity programmes. Next year will see two major votes. One in Italy, which the markets are already getting nervous about. But more important is the one in Germany.
Right now, the complacent assumption is that the German chancellor, Angela Merkel, is cruising towards an easy re-election. But that's far from a done deal. In fact, she's just as likely to be defeated. At the same time, Italy may switch to the anti-euro camp. So far, the eurozone policy-making elite has been uniformly pro-euro. In the coming year, that's going to change. The euro has been through many storms but this may just be the perfect one.
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True, it is the Italian election that's making markets jumpy right now and with good reason. Since he was shuffled out of office by the European Central Bank (ECB) and the EU, the former prime minister, Silvio Berlusconi, has quietly been manoeuvring his way back towards power. Berlusconi is a political as well as a commercial entrepreneur and can spot a gap in the market. He's started to position himself as the anti-euro, anti-austerity candidate and right now there is demand for that in Italy.
The protest Five-Star Movement, currently second in the polls, has promised a referendum on membership of the singlecurrency. While the centre-left may well win the election, at least 40% of the vote is likely to go to euro-sceptic parties. That will raise the prospect of Italy leaving the euro, with calamitous consequences for its e1.9trn bond market.
But the German election will be just as significant. The vote is due to be held in September or October next year. Merkel appears to be in control, and the assumption is that she will easily be re-elected to a third term. But that may well turn out to be wrong. The poll numbers are a lot closer than they appear at first glance. Merkel's centre-right CDU is scoring 40%, compared with its main rival, the centre-left SPD, on just 30%. But her coalition partner, the pro-business Free Democrats, have seen their support collapse and if they get less than 5%, they get no seats in Parliament. The Greens have seen their support rise to 13%. A Red-Green coalition could easily oust Merkel from power.
Could that happen? German voters are likely to be in angry, unforgiving mood come next autumn. The German economy is close to recession. Industrial production is sharply down, which matters because Germany is still a manufacturing-based economy. The Bundesbank is forecasting growth of just 0.4% next year. That is so close to zero it makes little difference, and if the forecast is only slightly optimistic Germany will be in recession. No greatsurprise there. Demand is collapsing across the eurozone and, as its largest economy, Germany was never going to be exempt from that.
Worse, both Italy and Spain may have called for full-blown bail-outs by then. It will be a miracle if both can stagger through ten months without their bond markets collapsing, particularly with Monti removed from power in Italy. The fiction that Greece will ever be able to repay all the money it owes is impossible to maintain much longer. So far, for all the grumbling, the euro crisis hasn't cost German voters any money even the loans to Greece have turned a profit (Germany charges Greece more in interest than its own debt costs it). By next autumn, recession-hit German voters will be paying real money for the bail-outs. We can all guess how well that will go down.
In fact, no leader of a major euro-zone country has been re-elected since the crisis started. Merkel seems unlikely to break that losing streak. So far, there's little sign that either the Social Democrats or the Greens are taking an anti-euro stance. But much can change during the course of an election. It is hard to know why centre-left or green parties should support a currency that has created youth unemployment rates across the periphery of 50% or more. And no one is going to win votes in Germany by supporting bail-outs.
No one can say how the eurozone end game will play out. What we know is that the currency union doesn't work, it just creates recessions across the continent. It's no longer plausible that the bond markets will trigger a collapse as the ECB will always step in to salvage the situation. Instead, its end will come when political leaders and electorates get fed up maintaining it. That was how the Bretton Woods system ended in 1971, when President Richard Nixon pulled the plug. It's also how the exchange-rate mechanism ended in 1992 when Britain walked out. It looks as if that's how the euro will go: one country will decide it's had enough and leave. It will take an election to trigger that. And 2013 will see some major ones.
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