The eurocrisis will dominate the financial markets and European politics in 2012. The euro area is the world’s second largest economy while the EU is still the leading global exporter and trading partner. In other words, a mortally wounded euro and EU will badly affect the rest of the world.

The euro crisis is now creeping into the very heart of Europe now that even the French credit rating is in jeopardy. The politicians will have to make the decisive move. Promising plans have been tabled but these are either long-term and/or too vague.

European problems are best summarized in the Chinese saying that British artist David Hockney recently quoted when he criticized fellow celebrity artist Damien Hirst. Hockney stated that to paint, “you need the eye, the hand, and the heart. Two won’t do.” It could be said that Europe falls short in all three respects.

First, it is not prepared to take a long hard look at itself. Europe prefers to bury its head in the sand instead of tackling the underlying issues. Constructive self-criticism rarely happens.

Second, the resources to solve the problems are not (yet) sufficient. Also because politicians and citizens are not sufficiently prepared to work together in order to defuse the crisis and ensure that the European public finances become structurally healthy again. The politicians are reluctant to go down this road because it may amount to political suicide. Citizens are averse because their leaders have not explained clearly enough why additional collaboration and integration in Europe is vital. Plus, many political leaders are far less capable than their predecessors. Sarkozy is no De Gaulle or Mitterand whereas Merkel is no Brandt or Schmidt. As long as politicians and voters have each other in a stranglehold, the mechanisms to resolve the crisis once and for all are out of reach.

Third, Europe is not passionate about acting as one. In the past, leaders such as Kohl and Mitterand saw the necessity of an integrated Europe and they put their heart and soul into achieving this while voters were enthusiastic about Europe at that time. Now they are anything but. Merkel and Sarkozy claim they are doing everything within their power to rescue the euro and the EU but many question their sincerity. Europe’s heart seems to be ruled by visceral anti-euro emotions.

In essence, Europe does have the wherewithal to turn the tide. European leaders convene every month now to discuss how to counter the crisis (whereas previously they would only meet up twice a year). On top of this they have until mid 2012 to deck up the European Stability Mechanism (ESM). Moreover, at the end of 2012 the ratification process should be completed of the fiscal treaty that forces states to sort out their public finances.

In short, there are plenty of opportunities to impress but it is equally possible that Europe will sorely disappoint the markets. 2012 will likely be the year when the markets force the political leaders and their voters to make a fundamental choice. Do they want a stronger Europe? That the answer will be affirmative cannot be ruled out if populism is contained and moderate politicians make a come back (and give the electorate less reason to vote for populists) while panic in the markets is avoided.

However, the eurozone is in great danger if the monthly meetings of the EU leaders yield very little result, if the ratification process of the fiscal treaty gets bogged down in controversy,  and/or if it turns out that the ESM counts for little when it is launched. The longer Europe waits before implementing major reforms, the larger the risk of a collapse of the euro. The odds are still that the single currency will survive but the tipping point is approaching fast.

Andy Langenkamp is a Global Political Analyst at ECR Research Pte Ltd.

a.langenkamp@ecrresearch.com