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In Europe, Everyone Will Worry About "Default"

Tuesday, 4 Dec 2012 | 8:00 AM ET
European Central Bank (ECB) headquarters in Frankfurt, Germany.
Hannelore Foerster | Bloomberg | Getty Images
European Central Bank (ECB) headquarters in Frankfurt, Germany.

The key word of 2013 will not be debt, growth or recession—it will be default. No one will want to use that word and will instead use terms like "forgiveness" and "realignment of future commitments." Here are five predictions for how this story will play out.

Greek Debt Forgiveness

This is already being discussed with officials in Germany floating the idea that Greek debt held by EU governments and the ECB should be forgiven. This will mean that all the Greek debt held on the books of EU governments and the central bank will be worth just 25 cents in the euro, significantly reducing Greece's debt burden as the coalition government battles to meet spending and revenue targets set by the so-called Troika. Once Greece gets this deal, others like Ireland, Portugal, Spain and Italy will begin to ask why they cannot get similar terms.

Unfunded Liabilities

Unfunded liabilities like public sector pensions will come under attack by policy makers across the world in 2013. Public sector pensions in Europe, generally quite generous, will have to be renegotiated if governments are serious about getting their budgets in order over the short, medium and in particular long-term. As we have seen at the city and state level in the United States, revenue collection at the local level has in many cases become a way of transferring taxes from workers to former police and fire officials. No government is likely to address this issue in 2013, but the debate will begin, and those who lose will take to the streets and strike to protect themselves against what is ultimately a default, no matter what you call it.

More Austerity

Days after this piece is published, the U.K. Chancellor George Osborne will deliver his 2013 budget plans to the Houses of Parliament. With his government's poll ratings very low, the chances are that Osborne and his boss, David Cameron, will decide to double down on austerity measures and take the axe to benefits for the unemployed. Aiming to make multi-year savings of over 10 billion pounds, the cuts will be hailed as putting the UK on the road to a sustainable debt burden, but will be seen by the millions of British unemployed in the U.K. as a default by the government on their entitlements.

Currency Wars

With U.S. federal debt topping $16 trillion and the majority of G7 countries' Treasuries also highly indebted, 2013 is likely to see lots of discussion about currency wars. The term, first coined by Brazilian finance minister Guido Mantega, will be wheeled out every time U.S. government policy is perceived by its creditors in the emerging world as being dollar negative. The U.S. Treasury will say it is committed to a "strong dollar" policy as the Asian exporters try to stop their currencies rising and making their exports uncompetitive in the world's biggest market. Given the dollar's safe haven status, it is highly uncertain that U.S. authorities could manage the dollar lower, even though the total amount of debt America would owe its creditors would fall as a result.

And Finally...

Here are five quick-fire predictions: Angela Merkel will win the German general election, Silvio Berlusconi won't go to prison, the Spanish housing market will fall sharply, Dmitry Medvedev will lose his job as Russian Prime Minister and the euro zone will NOT win the Nobel Peace Prize for economics.

PREDICTIONS 2012: ALLEN'S SCORECARD

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