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So what needs to go right in 2012 to ensure the year ends more optimistically than it began?
The key is for the eurozone to dispel doubts about its survival. This isn't impossible. Sure, the obstacles to the bloc remaining intact are formidable. Even so, important progress was made in the frenetic last few months of 2011 that may bode well for the future. The European Central Bank's offer of unlimited three-year loans to eurozone banks, while it fell short of the full "bazooka" that markets had been demanding, was still a significant move that for the first time started to break the toxic link between government and bank funding—and may even provide some support for peripheral countries' sovereign bonds. Of course, further ECB action is still likely to be needed. There is clearly a ferocious debate within the ECB over whether and how to engage in quantitative easing should the economic outlook deteriorate. But recent events confirm that despite its hard-line public talk, the ECB can, when necessary, show considerable flexibility.
Much now depends on whether the new governments in the crisis countries take advantage of any respite offered by the ECB and IMF to push ahead with structural reforms to restore competitiveness and create the conditions for growth. The importance of these supply-side reforms tends to get overlooked in debates about fiscal austerity, yet history suggests they can have a powerful impact on a country's growth potential.
Even with a newly expansionary ECB and governments delivering on reforms, the eurozone is certain to face further testing times this year. Eurozone countries must still agree and implement the new treaty enshrining their new fiscal rules, an important test of their political commitment to the long-term viability of the currency. It still seems likely that a long-term commitment to some form of budget-sharing via eurozone bonds will be needed to convince investors that governments are serious. Markets are likely to continue to put pressure on politicians to demonstrate their resolve in the months ahead.
But for the moment, the best bet must be that the eurozone will survive 2012. Given the chaos sure to surround a break-up, it seems reasonable to expect that governments will continue to do what is necessary to keep it together. What made 2011 so toxic in the eurozone was the widespread breakdown in trust: trust between governments, within governments and between governments and voters. Right at the very end of the year, it looked as if some of that trust might finally be being restored.
Eurozone leaders should make it their New Year's resolution to earn back the trust of electorates and peers. For without it, no one can look forward to the year ahead with any confidence.