Don't let the calm fool you: 2012 will be a make or break year for the euro and the euro zone. It is going to get very tricky from here on out.
1) expect an "austerity fatigue" backlash, which will take the form of more intensified protests, a rise in nationalism, and strengthening of anti-EU political parties.
2) as Europe remains mired in no-growth or some countries slip into outright recession, expect more outright disagreements among European leaders on how to tackle the crisis.
3) Italy and Spain's newly elected government have hit the ground running with tough austerity measures and broad programs of economic reform being discussed. But they are going to have to have enormous popular support and stay relentless focused to succeed.
Italy's Prime Minister, Mario Monti, is sounding increasingly strident, with rants insisting that austerity alone will not get Italy out of trouble.
The ECB is at the heart of the debate. Monti today said that the ECB needs new, broad powers, though he did not say what those powers should be.
He doesn't have to: everyone know that he wants the ECB to have the power to buy sovereign debt directly, something currently forbidden. The ECB is the lender of last resort to the banking system, not to sovereign countries. Not yet.
Nationalism and anti-EU sentiment: both on the rise. Popular sentiment against governments bailing out other governments appears to be growing, as is sentiment against the EU.
Hungary (not a member of the euro) has an elected right-wing, nationalist government that has aroused the ire of the IMF and ECB by passing a law that reduces the independence of the Hungarian Central Bank. There are concerns the government will use excess foreign exchange reserves to fund the national debt, which the government denies.
Hungary is paying dearly in the international markets for electing a far-right, nationalistic government. They paid 10 percent to auction off one-year bonds yesterday. Fitch downgraded their credit rating to junk, joining Moody's and Standard and Poor's.
In Finland, an anti-EU party, the True Finns, are riding a surge of popularity. They have opposed EU bail-outs and came in third in parliamentary elections nine months ago with 19 percent of the vote. The party's candidate for president, Timo Soini, has a chance of winning the first round of presidential elections on January 22nd. If necessary, there will be a second round on February 5.
In the Netherlands, the ruling coalition is dependent on the anti-EU PVV party. The PVV has announced it is opposed to any further austerity measures unless development aid is cut.
In Belgium, a six-party coalition was sworn in last month (after a year and a half hiatus), with many disagreements over austerity and the EU.
The message: pushing more austerity, and bailouts, is going to get increasingly difficult.
ECB meeting next week: bet against a rate cut. Europe heats up next week. Merkel and Sarkozy meet on Monday, there's bond auctions in Italy and Spain on Thursday and Friday, and an ECB meeting Thursday.
Ah, the ECB meeting: Will they cut rates again, currently at 1 percent? The euro zone is clearly on the edge of a recession, if not in one already — why shouldn't they?
Many traders think they won't: they think the ECB will want to keep up the pressure on EU politicians for political progress on the euro crisis. More rate cuts, or aggressive bond buying, will only make it easier to let tough decisions slide.
Or they will cut rates, just likely not at this meeting.
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