The market had its sights trained on Italy and Greece for much of 2011 as the Mediterranean economies struggled on the euro zone’s largest debt-to-gross domestic product ratios – and this is unlikely to change in 2012, according to analysts.
“The first half of 2012 will be the time when we will get a better feel if the euro is going to survive,” Thomas Mayer, chief economist, Deutsche Bank, told CNBC Monday.
“It all depends on whether the Monti government can stabilize the Italian economy and implement reforms.”
Ex-European Commissioner Mario Monti took over from Silvio Berlusconi as Prime Minister of Italy last month after a difficult year for Italy, the euro zone’s third-largest economy.
Mayer expects that the new technocratic government will be able to drag the Italian economy out of the doldrums next year, although it faces a difficult task.
The new administration in Greece has plenty on its plate, too, with a widening budget deficit despite harsh austerity measures.
“They are withdrawing an enormous amount of unsustainable, non-economic activity which has been in the country for years,” Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC.
“It’s all been about pulling back from the excesses of the euro area. Somewhere along the way, if we allow them to do it, with a proper field of play they can eventually rebuild themselves. Whether they can do that with all the weight of expectations and legacy that they are trying to shoulder is probably quite doubtful.”
Part of the plan to reduce the Greek deficit includes a mass privatization program of state-owned assets.
Corrigan believes that Greece should swap debt for credits in its privatization program to help get its debt “out of the system” and avoid selling assets too cheaply as part of a “fire sale.”
There are still plenty of concerns about other countries in the euro zone.
On Friday, ratings agency Fitch put a number of euro zone countries, including Italy and France, on negative watch and warned that it believes a comprehensive solution to the currency area’s economic problems is out of reach.
Mayer, who believes that the euro area economy will go into “deep recession” in the first half of 2012, said that the market "has settled down in a negative psychology" and will probably "require some action from the central banks" to get out of it.
European Central Bank (ECB) President Mario Draghi, who has repeatedly ignored calls for the ECB to intervene more in the crisis by serving as lender of last resort, told the Financial Times Monday that euro zone politicians needed to move quickly on the debt crisis.
“The big problem for the first quarter is this is when a lot of government debt is frontloaded for the rest of the year,” Corrigan warned.
“Greece may or may not be the biggest problem – the key might be the big guys.”