Santa Klaus & his PIIGS

The US looks better, but the news from Europe isn't all bad with a banking supervisor in place and the ECB/ESM showing results—but political Italy-type crises will keep erupting

Though the prospects of falling off the fiscal cliff in the US sends chills up everyone's collective spine, the likelihood of a deepening eurozone crisis seems a lot more probable, though it has to be said eurozone leaders have upped their act over the past six months. But, given the rot and the difficulty of taking action in a disparate set of countries vis-à-vis a single United States, it's not surprising the prospects of a eurozone recovery keep getting pushed forward—though lowering its eurozone forecast each time it does projections, the IMF is still looking at a possible, a barely possible, recovery in 2013; the OECD, in contrast, is looking at a further contraction in 2013. In the event of the crisis deepening, Europe's 2013 could be the worst it has seen so far.

Nothing quite tells the eurozone story like the birth of the European Stability Mechanism (ESM), Europe's permanent crisis resolution mechanism. In a sense, the Klaus Regling-headed ESM is a lot like the US Troubled Assets Reconstruction Program (TARP), but unlike TARP which was quick to lend funds and the resultant recovery ensured it has already recouped most of the money lent out by it (of the $466 billion disbursed since 2008, around $390 billion has been recovered, including a $20 billion profit on AIG), ESM's birth was itself a bit of a difficult one.

The eurozone's permanent firewall, with a maximum lending capacity of 700 billion euros (200 billion euro of this comes from what's left with the EFSF) was first cleared on February 2, 2012, to replace two temporary institutions, the European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM). Both EFSF and EFSM had limited budgets, grudgingly given, and far too few powers of intervention.

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