Focus Europe - Outlook 2012

Table of Contents
Euro Outlook 2012: Overview .......................... Page 03
Beyond string-pushing: What can the ECB do? Page 11
Fiscal Outlook 2012: An austere year .............. Page 18
2012: Need to focus on structural reforms ...... Page 27
Germany: It’s the politics, stupid! ................... Page 35
Euroland Inflation Outlook 2012 ....................... Page 39
Euro Sovereign Events ..................................... Page 45
UK Outlook 2012 .............................................. Page 47
CEE Outlook 2012 ............................................ Page 51
Rate Views ....................................................... Page 54

We believe the resolution of the euro debt crisis will remain the principal
theme in 2012. All other themes are likely to be derivatives of the crisis, from
the depth of the recession to national and regional political risks. Risks will
be manifold from the start of the year. We think a smooth return to the new
normal is unlikely.

We deem euro break-up as highly unlikely. But there is a challenge. The crisis
of confidence has gone deep. Resolution now requires fixing the flaws in the
design of EMU, correcting the mistakes made in fighting the crisis, and EU
willingness to finance itself through the ECB, either directly or indirectly.