Will the eurozone survive intact?

Yes. The commitment of member governments and, above all, of the European Central Bank to maintain the eurozone looks strong enough to keep it together for another year, at least. The governments of vulnerable countries will continue their austerity drives. The impact will be cushioned by International Monetary Fund programmes in the cases of Greece, Ireland and Portugal and by increasing support from the ECB for all of them, via the battered banks rather than direct intervention in the public debt markets. We can also expect further cuts in ECB interest rates and a weaker euro, both of which should ease the pain.

But the hairshirt approach is not going to work forever. At some point, the eurozone will have to return to strong growth, with relatively high inflation in the core nations, to accommodate the necessary adjustments in competitiveness of vulnerable countries. Austerity forever will almost certainly fail. But what is likely to be the grim austerity of 2012 should still work.