Dreams versus Reality in 2012

As we enter into the third year of the euro crisis, what New Year's resolutions should the key international players – the G-20, the International Monetary Fund and Europe itself – make so as to lay the crisis to rest in the year ahead? For Italy itself, the answer is straightforward: stick to the road taken.

With its policies increasingly well-aligned, one would expect investors' appreciation to emerge in due course, and for interest rates – while never returning to those at the start of EMU – to stabilize at sustainable levels. This is the way out that Italy is constructing for itself, and whose success depends also on the ambition of the commitments for the New Year made by the various supranational fora – with Prime Minister Mario Monti currently pressuring European partners in this regard.

With the crisis now having global repercussions (with the latest concerns regarding a possible credit crunch in Latin America), it is up to the G-20 to revive the spirit of collective action displayed in similar circumstances – in the post-Lehman phase in the spring of 2009 – but woefully absent since then, up to the latest Cannes summit. There is, at least, one factor that should favor more purposeful action. The leadership of the G-20 is now in good hands: those of Mexico, an emerging economy that is holding up well to the crisis, that has made intelligent use of the IMF's new precautionary facilities, and that brings a global perspective (rather than one of internal electioneering, as in the case of the outgoing French presidency) to the euro crisis. This is indeed the approach – with a strengthened role for the IMF, via contributions from all major countries – that Mexico has placed at the center of its G-20 presidency.

All very well and good, but it is unlikely that this approach will find support among the major G-20 countries. The U.S. administration, in full campaign mode, will – to put it mildly – be disinclined to support a multilateral response demonized by an increasingly isolationist Republican Party. Europe does a better job in talking the talk but seems unable to walk the walk: it is thus still struggling to provide the 200 billion Euro contribution to the IMF promised "within ten days" from the last summit, now a month ago. The United Kingdom, for its part, continues to opt out. In this context, emerging economies are understandably not inclined to rush to fill the financing gaps left by wealthier countries loath to help themselves. Not much hope can thus be stored in the next meeting of G-20 finance ministers in February, or in the G-20 summit itself in Baja California in early summer.

For its part, the IMF's resolution should be that of reasserting, in 2012, its stewardship over the international monetary system. In recent months, many authoritative voices – including those of Larry Summers and Bill Rhodes, former head of Citibank – have called for the restoration of a strong and independent presence at the center of the international financial system. The firmest such call came just a few days ago from Mohamed El-Erian, CEO of Pimco, the world's largest global bond investor, with up to US$1.35 trillion of assets under management – and with thus considerable influence on sovereign debt fortunes. Mr. El-Erian's intervention, which resonated widely in Washington, pressed the Fund to stand up to "European bullying," noting that "For two years, the IMF agreed to a series of programmes that were partially designed, inadequately funded and, in some cases, even threatened its preferred creditor status."

On this front, there is indeed some hope for greater assertiveness on the part of the IMF: Christine Lagarde is no doubt keen to mark her independence from her past as a European minister; the IMF's European Department, under new leadership, will also wish to move away from dependence on the "troika" with the EU Commission and the ECB (with Italy also set to feel the effects of any such move, via the forthcoming IMF monitoring); and the international community as a whole is itching for a more skillful management of the European crisis. There does however remain the problem of marshaling the required resources, without which even a more resolute IMF can do little.

Which brings us to the third player, Europe itself. Much ink has flowed on the desirable European response; suffice it here to recall its main elements: true fiscal federalism, supported by joint bond issuance; centralized banking supervision; and a lender of last resort. All to be accompanied by a campaign explaining its rationale to an understandably skeptical public, so as to avoid a worsening of the EU's already severe democratic deficit. A wide chasm clearly separates this list of desiderata from the reality on the ground. Even existing undertakings remain unfulfilled, such as the strengthening of the EFSF's resources, decided in principle last July, or agreement on the new fiscal pact announced in December. There are also clear doubts surrounding the launch of the permanent ESM fund within the new – and increasingly close – deadline of July 2012. In short, from Europe – led furthermore by relatively weak presidencies in 2012 (Denmark and Cyprus) – we can only expect "more of the same," with a continued, and inadequate, intergovernmental approach, starting with the umpteenth Sarkozy-Merkel summit on Monday.

None of this seems to bode well for Italy, but it should not deflect the country from the path undertaken, which in any event has no alternative. Having the external constraint continuing to bite for a while may even not be a bad thing, discouraging the political parties from champing at the bit and allowing the successful completion of the pro-growth "Phase 2" of reforms. In the hope that Prime Minister Monti will succeed in his intent to strengthen the European project, thus contributing to a virtuous exit from the crisis. This, indeed, is the New Year's resolution that all players should make for 2012.

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