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The New Year's season is a sentimental one, but this could be a watershed year for foreign exchange markets, since it may be the last year of the euro's existence, observes Martin Hutchinson of Money Morning.

To the complete shock of several analysts, the Eurozone managed to make it through 2012 without breaking up. However, 2013 is another story.

Now that Italy's Prime Minister Mario Monti has resigned, there's a good chance that Italy will be in the forefront of a new Eurozone crisis. That means 2013 doesn't look to be a good year for the euro, either-especially with new Italian elections likely to take place in February.

Of course, the EU establishment hopes that Monti can remain in office, but with four very different candidates now jockeying for position, Italy is one of the continent's great question marks. Here's why...

The leading candidates in this crucial contest include:

  • Silvio Berlusconi, leading the remnants of his former rightist coalition,
  • Monti himself, currently in negotiations with several centrist parties,
  • Luigi Bersani, leading the left-wing Democrats, currently regarded as most likely to win
  • And comedian Beppe Grillo, whose Five Star Movement is leftist and anti-authoritarian.

Of these four, only Monti and Bersani would represent the continuation of the status quo. The return of Berlusconi, whom the establishment forced out in 2011, would be a nightmare for the euro. That goes for the ascension of Grillo as well.

In the balance of this pivotal contest could be the fate of the Eurozone itself. At the extreme, Berlusconi or Grillo (or a coalition between the two) would almost certainly take Italy out of the euro, since Italy is capable of surviving independently. After all, its current account deficit is only 1.4% of GDP.

What's more, any move toward independence by these two would allow Italy to throw off the EU-imposed "austerity" policies that have inevitably proved both unpopular and recession-causing. At the other end of the spectrum, a Monti government (if one could be formed) would continue austerity and allow the euro to survive-at least until some other country such as France or Spain blew it up.

In the same vein, Bersani would attempt to keep Italy in the euro, but would reject public spending cuts and demand even more handouts. Judging by what Greece has been allowed to get away with, this might well work for a time, but one has to have real sympathy with the German, Finnish, Dutch, and Estonian taxpayers who will be made to pay for all this.

There's More To It Than Italy
And there's the sleeper problem, France. Even if Italy doesn't blow up the euro, there's a good chance France will.

Don't be fooled by those bond yields, either. French ten-year government bonds currently yield only 1.97%, far below the 5% to 6% yields of equivalent Spanish and Italian government bonds-but that only proves that bond dealers can't recognize a crisis until it hits them in the face. In 2006, after all, they were trading Greek bonds at less than 0.5% yield above German bonds. So much for rational markets.

What's also worrisome are the disappearing French millionaires. They are leaving the country in droves because of President Francois Hollande's ridiculous new tax policies.

It started when Bernard Arnault, France's richest man, made headlines when he renounced his French citizenship for Belgium in October. However, this flight of wealth is not limited to the hyper-rich like Arnault. Last week, it was revealed that French film star Gerard Depardieu had also moved to Belgium. Since Depardieu is a chevalier of the Legion d'Honneur and of the Ordre National de Merite, it's not as if he doesn't have substantial ties to his homeland.

Anecdotally, many other wealthy Frenchmen, less well-known than Arnault and Depardieu, are making the same decision. It is tough to live in a country which not only taxes your income at 75%, but then adds an annual wealth tax of up to 2% on your capital.

Meanwhile, France currently has a budget deficit of only 4.5% of GDP, but that will go up, especially as the country is expected by the Economist team of forecasters to have only 0.1% economic growth in 2012 and none at all in 2013-and given the exit of millionaires, the latter estimate is almost certainly too optimistic.