‘Grindingly Slow and Painful’ 2012 in Europe: SocGen

Europe is facing another troubled year in 2012, with huge disparity in performances between the members of the euro zone, James Nixon, Chief European Economist, Societe Generale, told CNBC Wednesday.

“There’s still an enormous political risk in Europe. After two or three years of grinding austerity, there’s a risk that some populations will turn around and say: ‘Enough!’” he said.

“There are three interconnected problems: high levels of debt; lack of competitiveness and a banking system that’s very exposed to sovereigns. None of them has been conclusively solved.”

The euro zone debt crisis dominated headlines and the markets in 2011, as the problems affecting smaller euro zone economies such as Ireland and Greece threatened to spread to the region’s larger countries.

The European Central Bank's (ECB) first ever offer of three-year loans, one of the methods that policymakers have brought in to solve the crisis, will be held Wednesday. If it is judged a success, it could help relieve worries about the euro zone.

“The ECB is hoping that the banks will take up at 1 percent and then invest on positive carry in some of the higher yielding sovereign bond markets. However, banks are still deleveraging and there’s capital ratio pressure,” Bob Parker, senior advisor, Credit Suisse, told CNBC.

He added that he thinks around 150-200 billion euros ($197-$263 billion) will be raised as a result of the auction – lower than the most optimistic prediction of 450 billion euros.

“The ECB already is undertaking quantitative easing,” said Nixon.

“When you add up how much the balance sheet has increased in the last two years, it’s topping a trillion euros. These are the measures that are keeping us alive.”

Parker believes that the recent lowering of yields on Spanish and Italian bonds won’t last long next year.

Italy, where a new technocratic government was appointed last month, has to refinance over 300 billion euros next year, which could mean that it ends up paying higher interest on its loans.

“Italy’s the one that really sticks out. You have got two years of really difficult structural consolidation and fiscal austerity, and, I think, negative GDP growth,” Nixon said.

“It’s very difficult to tell an aggregate story for Europe. Germany, for example, is still doing very well – it will have to work through a bit of the inventory cycle in the first half of 2012 but we think it will then power away.”

Germany, which has avoided the high debt-to-GDP ratios causing trouble elsewhere in the euro zone, has performed relatively well in the crisis, with strong exports helping to buoy the economy.