George Kerevan: Year of the eurozone crisis

It began with a serious yet containable problem regarding Irish and Greek sovereign debt and ended with shattered confidence in the monetary union and Europe’s banking system looking wobbly. What went wrong?

Basically political leadership went on holiday. Angela Merkel’s blind insistence that the European Central Bank (ECB) should not act as a normal lender of last resort to eurozone governments, and that sovereign risk should not be pooled through collective eurobonds, lies at the heart of the crisis. Unless or until she changes her mind, expect more trouble in 2012.

True, the year ended with the ECB pumping half a trillion euros into Europe’s illiquid banks.

This may delay the denouement of the crisis but ultimately guarantees crunch time. First, the markets know the ECB wants its cash used by the banks to buy distressed sovereign bonds, so it’s a case of Merkel having her cake and eating it. The markets won’t wear this fakery.

Second, the ECB is lending to the banks in return for collateral in the shape of their assets.

If any bank defaults then the ECB gets its money back first. Why will anyone lend unsecured to a European bank knowing this? ECB intervention has just guaranteed the demise of interbank lending and made illiquidity worse for 2012.

The positive story in 2011 was, surprisingly, America. US growth in the final quarter of 2011 is expected to be 3 per cent, which should be sustained next year.

Even the sluggish US labour market has seen a year-end improvement. The impetus comes from a continued fiscal injection, surprising consumer resilience, and strong company balance sheets. All this despite – or because? – America’s politicians have no plan to bringing down the deficit. George Osborne take note.

Trouble in the bond markets means higher yields, which pushes down equities. True to form, equities had a volatile last six months and the FTSE 100 could end 8-10 per cent down on the year.

That’s nothing to France and Germany, where shares have plunged by a fifth, dragged down by bank stocks.

In America, prices are off only a couple of points over the year and the futures index looks promising.

Overall, equities are still very cheap historically, but doom and gloom in the bond markets has sapped the appetite for risk-taking. The iconic business casualties of 2011 were Nokia and Blackberry’s maker, RIM – proof that the pace of technological change is not slowing, despite the downturn, and that markets are still doing their job in 2011 of discovering what consumers really want.

In commodities, the big surprise in 2011 was the divergence between energy prices and most other commodities – except gold.

Sluggish growth saw a 23 per cent fall in S&P’s industrial metals index while energy made a 20 per cent gain, on the back of increased consumer demand in the developing economies and post-tsunami Japan.

Energy held other surprises. First, solar panels went up in smoke. The downturn has slashed subsidies just as the market faced a glut. This week BP said it was quitting the solar market altogether.

Second was shale gas. In a process known as “fracking”, high-pressure water is used to pulverise rocks to release natural gas. Shale gas production has rocketed in America, halving gas prices. Lesson: don’t trust markets rigged by politicians.

The Scottish economy proved remarkably resilient in 2011, with the latest Bank of Scotland purchasing managers’ index showing output in the private sector still expanding at a modest clip – though foreign orders are slipping.

However, Westminster’s fixation with austerity has slowed overall UK growth to a crawl – and that’s even before the negative side effects of the euro crisis are felt here.

And that was 2011. It was probably inevitable that the great fiscal stimulus of 2009 would run out of steam about now, slowing growth.

And the need to pay down excess consumer and public debt was always going to take time.

Yet 2011 was made worse by the stupidity of politicians, cupidity of bankers and duplicity of the ratings agencies. Roll on 2012.

George Kerevan: Year of the eurozone crisis – and more to come