What does 2013 hold in store for the euro?

With a turbulent year behind it, the euro looks stronger now than at any point in the last 12 months. So what will 2013 mean for the common currency?

For my part, Id say the leaders of the Eurozone have pretty good reason to feel okay about how 2012 has gone. After all, they overcame the biggest challenge facing the currency union, that of doubts about its continued survival, while making big progress on a banking union, and keeping all its members on-board.

I dont think we should under-estimate just what an accomplishment this is. Back in July, when all you could read about were the inevitable Greek exit, Spanish bankruptcy, or wholesale Eurozone collapse, I moved quite a bit of my savings out of my Spanish account Im based in Madrid to the UK, I was that concerned.

For us to look at where we stand now and say, well, Greece looks more or less secure, Spain is on steadier ground, internationally at least, and the whole dang euro project is still going, well, its no small potatoes, to be sure. If I were Herman van Rumpuy, Im not sure Id feel satisfied, but Id sure be breathing a sigh of relief.

Not surprisingly, these dramas played out in the euro exchange rate too. If we look at the pound to euro for instance, it started the year at 1.20, climbing as high as 1.28 in July, when the crisis as at fever pitch. I remember thinking then, Well, the rates great, but theres a risk of the euro breaking up! What a double-edged sword.

Now, the crisis has abated, thats reflected in a sturdier euro again, with the pound at 1.23 against the common currency. Meanwhile, its been a similar swing with the US dollar, gaining nine cents against the euro at the worst of it all, before losing those gains now. For the euro then, that leaves us just as we were 12 months ago.

But of course, that was the past, when at this time of year all were doing is looking toward the future. So whatll 2013 bring for the euro?

Well, as you might expect, how the euro performs depends an awful lot on how the Eurozone performs. So for instance, are we set to see the currency union going through the same existential crises it did in 2012? I dont think so, which is one reason to suspect the euro wont fall as low as it did this year.

But, as you know, just because the patient isnt about to keel over and die, doesnt mean its fit as a fiddle. For instance, Greece will likely need its debts cut again, which at this point can only mean other Eurozone countries taking losses on their loans. Up until now thats been politically anathema, since it points to a transfer union.

For Spain, the chief political question will be whether Mariano Rajoy requests a bailout. Until now, hes quite miraculously been able to avoid this, but with 230bn in bonds to be issued next year, and most of the regions shut out of the markets, theres no guarantee this will last. Meanwhile, in Italy, the threat of Silvio Berlusconis return to the stage could destabilise the euro too.

Above all, probably the biggest threat facing the euro next year will be the peoples tolerance of austerity. In some countries, this is actually showing signs of working. Spains exports jumped almost 20.0% between 2008 and 2011, for instance. Yet this has been overshadowed by rising unemployment, falling living standards, and increasingly violent protests.

So, there is lots of potential for the euro to fall next year.

However, for all that, I find myself a Eurozone bull for 2013. Id like to think that, for all the suffering these austerity reforms have inflicted, theyll begin to bear fruit in earnest next year, putting Spain and other countries back on the road to prosperity. If that plays out, then maybe we wont be looking at how much the euro falls next year, but how much it gains.

What do you think? Is the worst of the Eurozone crisis behind us? Will the euro gain next year? Let us know your thoughts in the comments.

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