CHEWING OVER THE OLD YEAR, SPITTING OUT THE NEW

Perhaps not since 1989 have we witnessed a year as momentous as the last one. From the occupation of Tahrir Square to the mass protests in Moscow, from the Euro crisis to the calamity of the Japanese tsunami, from the London riots to the Libyan conflict, from the killing of Osama bin Laden to the death of Vaclav Havel, there was constant ferment throughout 2011. But how will the events of 2011 shape those of 2012? Four thoughts:

1 Most of the Arab world will remain undemocratic. But the political landscape has already been transformed.

2011 began with great hopes that the Arab spring could sweep away the Arab regimes. It finished with fears that not much had changed, and that what had changed may not necessarily have been for the better. Regimes in Bahrain and Saudi Arabia clung on to power, Syria brutally repressed demonstrators, the Egyptian army continued its bloody rule from behind the scenes, and Islamists and Salafists swept to victory in elections in both Egypt and Tunisia.

Both the original over-optimism and the current over-pessimism are misplaced. Revolutions happen quickly. The social and political changes they make possible take much longer to work themselves out.

MORAL HAZARD AND THE EURO CRISIS

The crisis that this week engulfed the Franco-Belgian Dexia Bank revealed how close Europe is to a new banking meltdown, and to an economic crisis that could be as devastating as that of 2008. It also revealed the dirty little secret about the eurozone crisis. Last  week, after a lot of political arm-twisting, the Bundestag approved extra funds for an expanded European Financial Stability Facility (EFSF) ostensibly for the bailout of Greece. In truth, Germany – and other eurozone nations – are bailing out not Greece but the banks that lent to Greece. They are stumping up money to stop Athens from uncontrollably defaulting, bringing down banks in France, Germany and elsewhere, thereby unleashing a new financial crisis. The proximate cause of the problem may be Greek debt. But the real worry is of a banking collapse in northern Europe.

One of the key criticisms of the EFSF bailout is that it rewards Greece for its mistakes, for breaking the rules of the eurozone project and indeed for the fraud that Athens perpetrated in accounting for its debt. The bailout, many argue, will lead to moral hazard – the rewarding of wrongdoers for the wrong they have done. But not only is the bailout really not of Greece but of the banks that foolishly lent to it, but rule-breaking was once almost the norm in the eurozone. When the single currency was launched in 1999, all nations agreed that a country’s annual deficit should be limited to 3 per cent of GDP and the total accumulated debt to 60 per cent of GDP. Miscreants were supposed to face a heavy fine. Within five years the two biggest economies in the eurozone, Germany and France, had broken the debt rules for three years in a row. Not wishing to slap down the most important countries in the project, Eurocrats quietly ignored the rule breaking. No sanctions were imposed.