There is serious concern that the sale of new cars in the UK will be reduced in the coming year because superstitious people want to avoid the 13 numberplate. Practical people may dismiss this as credulous nonsense but the prejudices of consumers, right or wrong, are still in their own right economic facts with which business has to deal.

In any case, even among the practical – especially among the practical – it is difficult to find anyone with serious business experience who is unworried about the year ahead. The euro looks shakier than ever. Italy’s technocratic but unelected government has retained the confidence of the markets but is in its last days: it will probably be replaced either by a leftist coalition under a former communist or possibly by the return by Silvio Berlusconi – neither a force for stability. In Spain, a new government trying to cope manfully with the consequences of its predecessor’s free spending faces huge unemployment. France’s attempt to develop an alternative to German austerity has been undermined by its reliance on a 75% top tax rate. The flight of that epitome of all things French, Gerard Depardieu, across the border to Belgium is symbolic of a general flight of confidence.

Any one of these three giants going the way of Greece and Ireland would be a greater catastrophe than both the latter put together – and any or all of the three could go next year. It will be a minor miracle if none of them does.

Before that, there is the small matter of America’s “fiscal cliff” to avoid. In a squalid bargain that does credit to no one, Democratic President Barack Obama and Congressional Republicans put off tough decisions on the budget deficit until after the elections. Now the elections are over, and tax cuts passed under the younger President Bush are set to expire. Almost no one in Washington wants that to happen, but President Obama, flushed with victory after his re-election, has initiated a very dangerous game of chicken.

He says he will veto the renewal if it includes the tax cuts on higher earners. Republicans who control the House of Representatives are pledged to apply the tax cuts to everyone. Whether they were wise to make such a pledge is beside the point: the political fact of the matter is that everyone remembers how the elder President Bush never recovered from going back on his equally unviable pledge of “no new taxes.”

Compromise is still possible, but there is very little trust and goodwill between the two sides. In any case, this is no way to run a global economy. Whether it is initiated in America, France, Italy, Spain, or one of a dozen other danger points, a crisis in 2013 is more likely than not, and this one will be down to the politicians, not the bankers and borrowers as it was in 2008. Hold on: it may be a rough ride in the coming year.

As patriotic Britons, the authors of this blog would not normally be unduly upset by the impending self-destruction of the French economy, followed by the collapse of the euro. We are actually rather fond of France, and have met a number of agreeable French people, but a thousand years of rivalry leave their mark.

Yet the world has changed. Markets have become more integrated, and confidence is still shaky after 2008. Global recovery is a very fragile structure, jerry built out of any bits and pieces that were found lying around, and it sometimes seems that it would take no more than a sneeze to bring the whole thing crashing down.

Europe sneezed twice over the weekend. First the Greek people voted against the parties which approved of a technocratic government to implement the austerity programme demanded by the EU if Greece is to remain in the euro. This should have surprised no one. The fundamental weakness of technocratic governments is that for austerity to work in a democracy, the voters must accept responsibility for it, but they have no inducement to so that when the government and people have been separated.

Then came the election to the French Presidency of a man who apparently has no business experience whatsoever – it certainly looks that way from the financial illiteracy of his programme.

Could this be the beginning of the end of the deals put together by Angela Merkel, the forceful German Chancellor, to save the euro? Are Franco-Hellenic demands for renegotiation going to prompt other reluctant signatories to band together with them? If so, the German fiscal discipline that has been the only thing giving the euro any credibility will be gone. Then the euro will either become a joke currency – which the Germans will not tolerate – or the eurozone will have to split in some way.

Many may not see this as a bad thing. It has been obvious for some time that the euro in its current form is unsustainable. Few would object to an orderly restructuring – but that is not on the table.

The problem is that another forced restructuring of the euro, probably with all the errors that came with previous forced restructurings, will undermine the already fragile confidence of the world markets. Investors will worry about what they have already tied up in the eurozone and be reluctant to commit more. Business will worry about the reduction in European purchasing power. These worried investors and businesses are American and British and Chinese as well as European. It is ironic for someone who has never been convinced by the European project to have to write these words but, for the moment at least, the global recovery may depend on the preservation of the euro.

That said, the euro is clearly unsustainable and is proving to be a recessionary instrument itself. We have previously referred to it as The Devil’s Currency. Sooner or later it will have to be fundamentally restructured or abandoned altogether. We would normally argue for ‘the sooner’ as the longer these things are left the more pain is ultimately suffered by ordinary people, or in our case ordinary businesses.

However, our concern now is that the fragile global recovery, if indeed one is under way, seems to depend on the euro staying in one piece for the time being. But, let there be no mistake, the euro has done enough damage already. Once a recovery is on more solid footing that should be the end of this ill conceived project once and for all.

John Richards’s Predictions for 2012

Since our previous predictions have proved fairly accurate, I am going to stick my neck out and give some fairly specific best-guesses for the next year. I must give the health warning that these are only extrapolations of present trends, and do not take account of currently unforeseeable events – which, of course, always occur.

First, the good news: the world as a whole should avoid a full recession in 2012 – emphasise the word should. All the bad news should not be allowed to obscure the fact that global business is growing, albeit slowly. Recovery from 2008 should not be expected to be spectacular, but it ought to continue, so long as everyone keeps their heads.

Alas, the bad news is that they are unlikely to keep them in Europe. The latest scheme to save the euro, FU (Fiscal Union), does not address its underlying problems. I predict the euro will survive, but not in its current form. Sooner or later, its weaker members must leave the single currency, for their own good as much as the euro’s. Yet there will be more time and money wasted before the EU’s leaders are forced to accept this obvious truth.

I can also see no end to the economic stagnation of the United States. Political gridlock will continue until the November elections. President Obama will then be re-elected fairly comfortably – not because he offers any solutions, but because he has more money, because he retains the uncritical support of most of the mainstream media, and because his Republican opponents look more and more like a suicide cult.

The second terms of re-elected Presidents are usually disappointing: it seems unlikely that Obama II will come up with a real vision for America’s economic recovery given that there has been no sign of such a vision so far in Obama I. Mr Obama was elected on a platform of Change; his probable re-election will mean No Change.

However, there is now more to the global economy than the old Western Powers. A sign of the times is that Brazil has just overtaken the UK to become the sixth biggest economy on Earth. This is not a negative reflection on the UK – where the outlook is not too bad so long as the British can keep their distance from the euro debacle – but one more indicator of the massive power shift that is taking place in the world. That may be bad news for the moribund economies of the West, but good news for the rest of the planet, and for those American, British, and European businesses who see what is happening and look for new opportunities where the growth is.

It is a commonplace to say that the world would be better off without politicians. Of course no one really means it – but it may be true in the economic crisis that is now brewing. Our political leaders, far from averting this crisis, are themselves the cause of it.

The same was not true of the 2008 crisis. The politicians were a contributory factor then, but by no means the only one or the most important. The global economy survived that crisis and has been recovering, albeit very slowly, since then. The 2011-12 crisis is a new one and is entirely of the politicians’ own making.

A little local difficulty in Greece has been blown out of all proportion by European politicians’ obsession with maintaining the euro in its current form at all costs. The actual needs of the different national economies of the EU have been put second to keeping countries in the eurozone who should never have joined in the first place.

Leaving aside the question of the desirability of a single currency in theory – there is case for and a case against – the deal cobbled together in a panic by European leaders last week is not a sound basis for such a currency. Although EU leaders are right that tighter enforcement of the rules is essential to any single currency, the new proposals, called “fiscal union” (FU), leave the same holes in the deal that led to the wholly foreseeable collapse of the previous arrangements. The markets are now endorsing the position of the UK, which wanted nothing to do with it.

Meanwhile, the stupidity and egotism of Europe’s leaders seem to have provoked the competitive streak in their American counterparts, who appear determined to prove that they can be just as stupid and egotistical. Everyone is at last agreed that a cut in payroll taxes is a highly desirable stimulus to employment – something this blog has been saying for some time – so one would imagine it would pass without difficulty. Not in Washington...

For purely political reasons, President Obama and his Democratic allies tied the payroll tax cut to an increase in taxes on higher earners, knowing his Republican opponents are pledged to oppose tax increases. Rather than stick to the moral high ground, the Republicans, in their turn, tied their support for the tax cut to funding a controversial pipeline in the worst tradition of American “pork barrel” politics. Given that the Republicans were elected on a platform of cutting both taxes and “pork barrel” expenditure, their making the cut conditional on more expenditure is doubly inexcusable – at least the Democrats are being true to their principles, even if what they are doing in bad for the economy. Both sides have proved themselves selfish, foolish, and dishonest, but in different ways.

Looking at our “leaders” in general, even a law-abiding businessman must wonder if the anarchists may have a point.

So don't think you can fool me with your political tricks
Political right, political left, you can keep your politics
Government is government and all government is force
Left or right, right or left, it takes the same old course
Oppression and restriction, regulation, rule and law
The seizure of that power is all your revolution's for
You romanticise your heroes, quote from Marx and Mao
Well their ideas of freedom are just oppression now

Nothing changed for all the death, that their ideas created
It's just the same fascistic games, but the rules aren't clearly stated
Nothing's really different cos all government's the same
They can call it freedom, but slavery is the game

Extract from 'Bloody Revolutions' by Crass

The euro crisis has now claimed a centre-left Prime Minister in Greece and a centre-right one in Italy. Leftist Spain is keeping a low profile, trying very hard not to be noticed – almost certainly in vain.

Yet it would be a mistake to write off the Mediterranean economies as “all the same”. Greece is a true basket case, a welfare state in the literal sense – a state dependant on welfare – underwritten mainly by the Germans. Italy, however, is in many ways a strong economy, at least in parts, with lots of viable businesses and an understanding of the need for international marketing. The present crisis is all about past deficits rather than future prospects.

Italy’s underlying problems go back a long way: weak governments since the beginning of the Republic encouraged structural inefficiencies. As a result, public sector debt has grown out of control under governments of both left and right. This could be ignored in the years of growth, but not since 2008.

Silvio Berlusconi attempted some reforms, but half-heartedly and largely without success.  So the markets rose a little on the news of his resignation – only to fall dramatically when realisation set in: If Berlusconi cannot deliver reform, who can?

There is no one in Italian politics with anything like Berlusconi’s power and personal dynamism. Although he has lost the high approval ratings he once enjoyed, the fact that he ever had such large majorities makes him almost unique among the Republic’s Prime Ministers, and he still has a larger block of parliamentarians and voters loyal to him than any other Italian politician. He might object to the comparison, but he was the most powerful Italian leader since Mussolini. He delivered an unparalleled period of relative stability in Italian politics. If he must share some of the blame for some of Italy’s failure to reform, he also deserves at least part of the credit for her recent prosperity.

Largely portrayed in the English speaking media as a buffoon, he is nevertheless a self-made multi-millionaire and understood business – unlike the career politicians and bureaucrats of the European Establishment, who never embraced him. His clowning led many to underestimate him: his road to power was over their political graves. He was a product of the openly corrupt Italy of the 70s, but he did not create the system that made him and which he exploited so skilfully. An unelected technocrat is unlikely to succeed where he failed.

Many Italians say openly that only a Mussolini can sort their country out. The EU seems keen to take on that role. For all his many, many faults, Silvio Berlusconi may yet go down as having been the last, best hope of Italian democracy.

At the very least, the eurozone will weaker without him – and a lot duller.

Although most nations boast of their valour, for sudden reckless courage you really need a Frenchman. This courage is not the everyday steadiness of the Briton – indeed, it may only occur erratically – but, when it appears out of the blue, it is spectacular: France is the nation of Roland, du Guesclin, Joan of Arc, Bayard, Cyrano de Bergerac, d’Artagnan, Murat, Danjou at Camaron, and a rugby team that stood up bravely to the All Blacks.

It is also the nation of Nicolas Sarkozy, who had his own moment of insane courage last week when he admitted that it was a mistake to let Greece join the euro in the first place.

Since this an obvious truth, an objective observer might ask why he deserves any credit for stating it. Yet the Western political Establishment is now being held together only by a complex network of fantasies. The markets are buying into these illusions – literally – because the alternative is collapse. For a President of France, a country whose economy has been based on illusion for decades, to question just one of these lies is to question the whole structure.

That the euro is, was always, and remains conceptually flawed is obvious, but that is just one of several basic truths our leaders are incapable of accepting, at least in public...

1   The latest “deal” on the euro is no deal at all: it depends on the Greek and, now, Italian voters and their representatives agreeing to serious reforms, which they currently have no incentive to accept.

2   In exactly the same way, the “deal” on the US government debt that was agreed earlier this year is unravelling, as this blog predicted, because referring the matter to a committee was only postponing the problem. 

3   Government debt, not growth or employment, remains the real problem in the West. The latest American GDP figures confirm another of this blog’s predictions, that, although growth will remain sluggish, a double-dip recession is avoidable. Yet politicians and central bankers have lost focus: in their obsession with “jobs”, they are pushing still more money into the economy – which is the problem, not the solution.

4    Inflation is now a serious danger, again as we predicted.

5   The solution to unemployment is not more injections of cheap money but improving business competitiveness. That, however, is a long, painful, unspectacular process that does not appeal to politicians.

6   The crisis of 2008 was due, first and foremost, to the bankers, but it ended very quickly and the markets recovered from it; the crisis that is now brewing is a new one and one entirely of the politicians’ making.

We have been reluctant to post over the last week or two out of a very real fear that anything we said would be out-of-date a few hours later.

However, this does not mean that anything that has happened is at all surprising or incredible, as some in the media have claimed. On the contrary, we were not the only ones to predict that there must be severe consequences if European politicians did not face facts about the euro and Americans did not get real about their debts.      

Being proved right, again, gives us little pride and no pleasure – little pride because it was all so obvious that we do not deserve much credit for spotting it, and no pleasure because it is frustrating that such an avoidable disaster was not avoided.

It is doubly depressing that the politicians still have not learnt their lesson. The response of the European Central Bank, buying debt from badly run countries, is treating the symptom not the disease. Greece must be kicked out of the eurozone. Such a display of resolution might be enough to keep other failing members in. If not, the euro cannot continue as it is. Everyone knows this.

Everyone also knows that the American “debt deal” is nothing of the sort. It is full of holes. Referring the real decisions to a committee is a politician’s way of avoiding his duty. At best, it simply postpones the problem – like kicking the ball to touch in a rugby match so that both sides can catch their breath. At worst, it means that the big crisis is yet to come: the real fighting will start when the committee reports – if it ever does.

Given this prospect, Standard and Poor’s decision to strip the United States of its AAA credit rating is fair, albeit perhaps a little premature. The politicians who are complaining about it are in a state of denial. It was rude of Mr Putin to call America a parasite on the global economy for sucking up so much of the world’s available credit – but he was factually correct. It is shameful that the USA has now surrendered the moral high ground to a past KGB Colonel.

All that said, too much should not be read into the current market turbulence. For one thing, the big players agree that most businesses are slightly over-valued by the markets, so some readjustment is necessary. It should also be noted that it is summertime, when the players themselves are away, and nervous juniors are running the office.

Things will calm down soon – but only until the players get back to their desks and find that the politicians have not done anything in the meantime to solve the problems that are now all too obvious.

The markets are very nervous – and rightly so – about the debt crises in Europe and the United States.

Yet the frustrating thing about both crises is that they should be relatively easy to avert. They are not mega-tsunamis or planet-killing asteroid strikes that are beyond all human control. Nor are they mysterious: there is no need for a new Keynes to tell us what is happening, because anyone who can read a newspaper and do basic arithmetic knows exactly what the problems are. They are foreseeable and were foreseen, and indeed have both been rather unmissable for some years now.

Above all, they should be very easy to solve, given the political will. The solutions are not rocket-science. Everyone knows what needs to be done, and what will eventually have to be done.

In the United States, the government must stop spending as much as it does. The federal deficit is unsustainable. Sooner or later, there must be cuts, and there will be. Delaying the evil hour only makes it worse. Even the flawed Class of 2008 understood that there comes a time when unpleasant decisions cannot be put off.

In Europe, there is a limit to how much the more prudent nations can prop up the more feckless in order to maintain the pretence of a single currency. Does anyone, even the most sincere European federalist, really believe that Greece can and will remain a member of the eurozone indefinitely?

Everyone in the business world knows what has to happen. So – at least privately – do most politicians. So why delay? Everyone is agreed on the decisions that need to be made, so the sooner they are made the better.

Yet the political class seems paralysed with indecision. President Obama, obsessed with his re-election next year, has failed to take control of negotiations with Congressional leaders by advocating bold measures: once again, he has shown himself to be a reactive President, rather than one who seizes the initiative. Meanwhile, across the Pond, the European Establishment is terrified that suspension from the euro of Greece – and then probably Portugal and Spain, and maybe Italy and Ireland – will undermine the credibility of their whole cherished project of European integration.

It is tragic that in the whole pack, there is not one real leader with the guts to say, “We all know what we are going to have to do. Let’s just do it.”

For the real tragedy is that nothing magical is required here, only the courage and honesty to do what clearly needs to be done – in other words, leadership.

In our recent podcast on the euro, we discussed the possibility that the preservation of the European single currency might depend on weaker nations, such as Greece, leaving it.

That possibility is now being taken seriously by the markets.

It is, however, curious that they expressed their concern by devaluing the euro against the dollar. Logic dictates that the euro should be worth more if it does not have to underwrite the budget deficit of the spendthrift Greek government.

It might be the best thing that could happen to the euro if Greece left it for a while, followed by Portugal and perhaps even Spain. Those are the countries which ran up the worst government deficits – despite the euro’s supposedly strict rules – and which are still reluctant to tackle them. Ireland also ran up a horrendous deficit, but seems prepared to take firm measures.

Needless to say, there are vociferous official denials. Equally needless to say, those denials are not being believed.

The authors of this blog are not currency speculators, nor are we qualified to advise others on currency speculation, but, if we were, we might be tempted by the prospect of putting surplus cash into euros.

Something has to be done. Something is going to be done. If the Greek government and the other basket cases do not do it, someone else will. The Germans are getting impatient. When they act, the euro will be strengthened – and they will act soon if no one else does.

Eire, the Republic of Ireland, is a classic example of how low business taxes can generate prosperity even in the most unpromising of places. Although Irish people around the world are very entrepreneurial, the Republic itself was an economic backwater for most of its history. That changed when tax cuts attracted massive inward investment and turned Ireland into the “Celtic Tiger”.

The fact that Ireland is now in financial trouble does not alter that fact that it proves the effectiveness of a low tax regime. The current crisis arose in spite of Ireland’s success as a venue for inward investment, not because of it.

The low business taxes remain Ireland’s greatest competitive advantage – so it is sad that the Republic is almost certainly going to have to give them up.

The Republic’s mistake was not its low taxes but its failure to exploit their success in attracting inward investment. Instead of using the opportunity to develop its own indigenous enterprise culture, the Republic enlarged its already bloated public sector. Instead of investing in the capacity to generate even greater prosperity, Ireland’s politicians became addicted to higher spending.

So the global banking crisis only exposed that the Tiger was more of a kitten than it appeared. Bailing out Ireland’s banks increased state spending even more, and the government made the problem worse by adopting a strategy of hoping it would go away if they ignored it.

The European Union has now stepped in to bail out the Republic itself – but at a price. It is hardly surprising that the national governments who are providing the actual cash – Ireland’s competitors in Europe as well as “partners” – demand that taxes go up in return. They have long been jealous of the competitive advantage Ireland has enjoyed as a result of low taxes, and so they can hardly be expected to underwrite it.

That is why the Irish have been reluctant to accept the bail out. Without those low taxes, the economic future of Ireland looks grim. A virtuous circle may be replaced by a vicious circle – higher tax rates reduce the tax base and so increase demand for even higher tax rates. Ironically, this may mean that the very people who are insisting that the Republic raise taxes may end up paying even more than they intended to underpin the Irish economy.