Doomsayers adjust predictions after ’12 apocalypse averted Experts underestimated political will to keep euro together

BERLIN, Dec 28, (RTRS): Back in May, as the euro zone veered deeper into crisis, Nobel Prize-winning economist Paul Krugman penned one of his gloomiest columns about the single currency, a piece in the New York Times entitled “Apocalypse Fairly Soon”.
“Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams,” Krugman wrote. “We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years.”
Krugman was far from being alone in predicting imminent doom for the euro in 2012. Billionaire investor George Soros told a conference in Italy in early June that Germany had a mere three-month window to avert European disaster.
Then in July, Willem Buiter, chief economist at Citigroup and former Bank of England policymaker, raised the probability that Greece would leave the euro to 90 percent, even going so far as to provide a date on which it might occur.
Buiter’s D-Day — Jan 1, 2013 — falls next week. And yet no one now believes a “Grexit”, or catastrophic implosion of the euro zone for that matter, is just around the corner.
Half a year ago the chorus calling an end to the euro reached a crescendo. Among the chief doom-mongers were some of the world’s leading economists and investors, many of them based in the United States.
Fast forward six months and their prophesies look ill-judged, or premature at the least. The euro has rebounded against the US dollar. The bond yields of stricken countries like Greece, Spain and Italy — a market gauge of how risky these countries are — have fallen back.
Even the gloomiest of the gloomy are revising their forecasts, although they warn of more trouble ahead.
“Europe has surprised me with its political resilience,” Krugman admitted earlier this month in a blog post.
In October, Citi lowered its view on the likelihood of Greece exiting the currency area within 18 months to a still high 60 percent and there are plenty of economists who think that while a patchwork of measures have drawn some sting out of the crisis they have done little to address its root causes.
Krugman and Buiter did not return mails seeking comment. Soros declined to be interviewed.
With the benefit of hindsight, it seems clear that many simply underestimated the political will in Europe to keep the euro together, and the impact that a series of policy shifts in the second half of 2012 would have on sentiment.
The most important of these were European Central Bank President Mario Draghi’s July promise to do “whatever it takes” to defend the euro — which led to the ECB’s commitment to buy euro zone government bonds in sufficient amounts to shore up the currency bloc — and German Chancellor Angela Merkel’s late-summer shift on Greece.
After wavering for many months on the costs and benefits of a Greek exit, she finally came around to the view that the risks to Europe and her own political prospects of letting Greece go were far too great.
“There may be a logic to Greece leaving, but the mechanics are too disruptive for both Greece and its neighbours,” said Barry Eichengreen, an economist at U.C. Berkeley, who has long argued that the euro is irreversible.
“An appreciation of European politics makes you realise that everything will be done to prevent a breakup of the monetary union. It would be intensely catastrophic, economically and politically.”
Capital Economics, a UK-based consultancy that forecast one or more countries would leave the single currency bloc by the end of 2012, now concedes that it underestimated the ECB’s determination to save the euro and the market’s faith in the bank’s promises. “It may simply take longer,” Jennifer McKeown, senior European economist at Capital Economics said of a euro breakup. “It’s obviously not happening this year.”
Prominent investors have also paid a price for betting against the euro zone this year. Earlier this month celebrated US hedge fund manager John Paulson blamed big losses suffered in 2012 on his bets that the sovereign debt crisis would worsen. For those who placed their chips on the other side of the table, there were stellar returns of around 80 percent to be had on 10-year Greek and Portuguese government bonds this year.

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