The resignation of Italys prime minister, Mario Monti, confirms my view that recent optimism that the euro crisis has been fixed is just plain wrong.
Uncertainties about the Italian political scene will worry markets in the new year and might well push Italys economy further into depression. That makes it much more likely that, ultimately, Italy will have to enter a euro-bailout programme.
That would be the final challenge for Europes leaders, because Italy is too big to fail and too big to bail out. Something will have to give: either Germany must allow fiscal transfers and complete the EU banking resolution mechanism, or a euro break-up will be back in the minds of markets.
Sure, Monti might yet come back as premier after the elections and it is very unlikely that former premier Silvio Berlusconi will win enough support to form a government opposed to further reforms and antagonistic to the eurozone agenda.
However, the uncertainty is there, if only about what the most likely winner of the election, Democratic Party leader Pier Luigi Bersani, decides to do. He says he will stick to Montis policies, but he will be under pressure from the unions and other vested interests to go no further on market reforms designed to make Italy more competitive.
And the crisis has not gone away in Spain or Greece either, despite the recent fall in sovereign bond yields since the other Mario, Mario Draghi of the European Central Bank, announced that the ECB was ready to buy the bonds of distressed EMU states that have to enter troika-style fiscal programmes.
Sure, the outcome of the Catalan regional elections put the issue of a break-up of the Spanish state on the back burner, but Spain still needs a debt bailout. And the Greek debt deal puts off a crisis there for another year, without solving the insoluble.
In Spain, the issues of independence and austerity will remain on the boil. That wont make it any easier for prime minister Mariano Rajoy to go for a bailout programme. Whatever the terms of such a programme, it will be seen as another surrender to foreign-imposed austerity. And for now, Germany does not want Spain to enter a programme until next Septembers German general election is over.
Then there is Greece. After a tortuous process, the euro leaders and the IMF have agreed the terms for releasing the funding tranches needed by Greece to last through the first months of this year. The terms are a typical eurozone collation of clever financial engineering, including a buyout programme of privately held sovereign debt probably imposed on the Greek banks at financially repressed prices an extension to the length of the bailout programme, a 15-year delay on repayments and substantial reductions in the cost of borrowing.
Even so, the target set by the IMF for getting Greek debt down to 120% of GDP by 2020 has been relaxed in return for a target of below 110% by 2022.
Land of make-believe
However, these targets are just make-believe. There is no way the Greeks can meet these targets over the next few years, yet the euro leaders are committed to keeping Greece in the eurozone for fear of disintegration. This contradiction can be put off for a while but not forever.
Europe remains in recession, with a further contraction in output next year for Spain and Italy, while Greece enters its sixth year of depression. The only good news is outside Europe. Global growth should pick up next year, led by manufacturing in emerging Asia.
And the US will likely lead the way in the developed economies, once the fiscal-cliff dispute is settled. That battle will likely have been fudged or put off before Christmas, leaving both sides to reach a final half-baked solution early this year.
In the meantime, the Fed under Ben Bernanke will continue with QE3 and buy yet more government and corporate debt until the proverbial cows come home.