The eurozone survived 2010. My prediction is that it will survive in 2011. The question is, in what condition?

Quite probably we will see more funding crises, as some eurozone governments and banks seek to refinance their debts. We must also be prepared for a public backlash against what in several countries are the most extreme austerity programmes since the 1930s. The euro, even if it survives the year, will remain a source of political, economic and financial instability for the eurozone itself and the world as a whole.

One can look at the future of the euro from a political or historical perspective, as is so often done, or from a macroeconomic one. However, to understand what is likely to happen in the next year or so, I find it more instructive to look at it from a risk-management perspective. The foreign owner of a Greek, Irish or Portuguese bond, for example, faces two specific dangers that result directly from the present crisis. One is the risk of a eurozone break-up. The other is a default risk – in which case the debtor defaults but stays inside the eurozone.