If 2012 was the year of the "fiscal cliff" and unlimited bailouts in Europe, what will 2013 be? Making economic and financial forecasts is never easy -- and I usually stick to the long-term variety -- but here are some of the topics that may sway global markets in the coming year, for better or worse:
In the eurozone: The person who helped to calm markets most in 2012 was probably Mario Draghi, who became head of the European Central Bank only a year ago. With one short statement -- punctuated by the line "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough" -- he committed to keeping the euro area together essentially by printing as much money as necessary to buy up its bonds. The question is whether his credibility will last through another year. Even if the common currency is safe for now, it will not be stronger unless Draghi can force finance ministers to accept new rules about how countries enter, leave, and act in the euro area. Even then, setting a single monetary policy for a group of economies at different stages of boom and bust will be a thankless task. Their economies need to come into closer synch for the euro area to work as planned -- and that's unlikely in 2013.
In Britain: Meanwhile, the markets will be watching Mark Carney's first moves as governor of the bank of England. The former governor of Canada's central bank and Goldman Sachs alum has the respect of investors, but he's facing a much more difficult situation in Britain, which is currently hamstrung by a backwards fiscal policy, than he did in riding Canada's resource-fueled boom. In fact, he'll be working in an environment much closer to what Ben Bernanke, the chairman of the Federal Reserve, has had to deal with in the United States, where Republicans in Congress blocked fiscal stimulus even as the country struggled to recover. Bernanke was forced to take extraordinary measures to fulfill the Fed's mandate; Carney may also have to get creative in London, as he is surely in for a long slog.
At the Fed: Investors are already starting to wonder who will replace Bernanke when his term ends in January 2014. The Fed is undergoing something of a policy shift now, having decided to target an explicit level of unemployment as well as a maximum threshold for inflation. It's unlikely that the Fed's pledge to keep rates low through 2015 will change, unless the global economy should suddenly boom. But the new chairman (or chairwoman!) will determine whether the Fed cements the first major change to monetary policy since Paul Volcker took over in 1979.
Whether it happens before or after January 1, the United States will find a way to make sure taxes don't rise on most middle-class families, and also to avoid arbitrary spending cuts in some government departments. The fiscal cliff will turn into something like a fiscal ramp. Afterwards, the deficit will remain. As I and others have said, it is neither so big nor so difficult to control as some politicians might like the public to believe. Once the rhetorical fog clears, markets are likely to feel more comfortable with the nation's fiscal situation and respond accordingly.