Jeremy Beckwith: The year of living dangerously looms for politicians

THIS year promises to be a very important year for politicians. The decisions they make - or don't make - will have profound consequences for their economies and the financial markets.

In Europe this is very obvious. The gaping wounds of the eurozone's sovereign credit crises in 2010 were only fixed with some very temporary sticking plasters pending a much more fundamental operation, currently expected in March.

To be successful, this needs to involve some major steps towards a fiscal union or a genuinely European economic government. To convince the markets that the euro has a long-term future, German politicians must agree to substantial and ongoing transfers to other eurozone countries, whilst the politicians of the other nations will have to be prepared to accept that the future economic management of their countries will bear a much greater German imprint.

For example, stability, an export orientation, balanced budgets and low inflation will be far more important than public-sector wage rises and debt-fuelled domestic consumption. And there will be painful sanctions for non-performance.

The job of politicians of the recipient nations is not merely to agree this between themselves, but also to convince their voters and their domestic political opponents that this is the best way forward, so that the markets believe there to be a permanent change to the European landscape.

The current Irish opposition, likely soon to be the Irish government, may have particular problems here. Angela Merkel has also to achieve this without breaching the "lines in the sand" around national sovereignty that have been set by the German Constitutional Court. The markets remain to be convinced that all these objectives can be achieved and will deal harshly with any fudging in the eventual solution.

In the UK, May is expected to see a referendum on the future use of the Alternative Vote system in future general elections. Should this referendum not happen (it still has to be approved by Parliament), or if it is lost, then many Liberal Democrats may wonder precisely what advantage they gain from continuing to stay in the coalition. The discipline required of the Liberal Democrats to continue supporting Conservative-inspired cuts may prove too difficult.

The Conservatives too will have to show resolve as the first stage of very painful public spending cuts is felt by the public - for many these cuts are an ideological as well as an economic necessity, but more moderate Conservatives may begin to wish for a less severe medicine, and further popular unrest is likely.

A failure of the coalition would probably lead to a general election in the autumn, which on current opinion polls would be too close to call - the pound and the gilt market would suffer notable losses.

In the US, the Republican Party appears set to block Obama from doing anything, thus entrenching opinion that he is a weak president.With unemployment likely to continue above 9 per cent for some time, a Congress that will not pass further stimulus bills and a Federal Reserve that will be increasingly challenged over its actions by the Republicans, about the only action that Obama may feel able to take to boost jobs and his ratings may be some sort of protectionism against China.

Given the continually expanding trade deficit between the two countries and China's unwillingness to address seriously the dollar-renminbi exchange rate, it may not prove too difficult for most US politicians to justify voting for import tariffs on Chinese goods, following the protectionist path of the 1930s.

China too has its political issues, complicated by its own political cycle, which sees the next two years as the key period of infighting before the next set of leaders are announced in late 2012. This will mean that domestic considerations on inflation and employment are likely to trump international considerations such as further stimulating the economy and adjusting the exchange rate.

The alacrity with which Chinese policymakers have acted in response to steeply rising food prices, compared with the tardiness with which they have approached the exchange rate issue, highlights this battle very clearly.

• Jeremy Beckwith is chief investment officer at wealth manager Kleinwort Benson.