Of the three main party leaders, Cameron has ended 2011 on an unexpected high. He has had a difficult year dogged by judgment questions, made HD by his misplaced loyalty to Coulson and his slow reaction when phone hacking went viral. Libya could have been a disaster, but for the time being appears a success. Nevertheless there lingered the feeling that the Prime Minister had over Gaddafi been lucky rather than smart. On came the Euro crisis. This played into his euro-sceptic hands. Even an eye-catching backbench rebellion over the demand for a futile referendum did not have anything like the impact commentators expected and Labour devoutly wished.

Then came that veto in the middle of the night. This was Cameron’s Falklands moment. The French fumed and said nasty things. The intelligentsia tut tutted. Clegg first said yes and then no. But the crowds were wowed. Anti EU feeling among voters is at an all time high. They are fed up with petty regulations of the kind continentals love and ignore, while we dutifully write them in to every bit of health and safety, employment and human rights legislation. Especially now they are fed up with the fact that the UK recovery is about to be derailed by political ineptitude in the eurozone. Cameron has at last established himself as the national leader significantly preferred by voters. The polls are moving to the Tories.

Nick Clegg has had a baptism of continuous fire which is still going on. He struggles hard to hold his party on the right side of panic and works doggedly to spin the idea that the Lib Dems stop the Tories being nasty. He has indeed held a much retreated line and his Lib Dem colleagues mostly have good reputations as competent ministers. He has three big problems nevertheless. His party is pro Europe when the majority of the country is anti. The two main parties now dominate political debate, with the addition of the Nationalists in Scotland. Fewer and fewer see the need for the Lib Dems. This was born out by the wholesale rejection of AV, which was in a sense a rejection of third party meddling. But worst of all there is the memory of the most spectacularly broken promise in post WWII political history. Tuition fees. That wiped out a whole generation a Lib Dem voters. At present it is impossible not to see more losses in council elections and an eventual return to a couple of taxi loads of MPs. Nick will retain his place in history and go on to become one of the political wise men called in by the Today programme or BBC News 24. But after the next election a lot of unexpected events will have to move his way if his party is to have any sort of chance of remaining in government.

As for Ed Milliband, there is little to say. He is not up to the job and this is a great disappointment. The trouble for Labour is that for too long it was dominated by the scrapping Brown and Blair and then became obsessed with not one Milliband but two. There is now little talent on the Labour front bench, a bit like the post Thatcher Tories. Only one has the ability and she is the one who would not step forward; Harriet Harman. She may yet be called. There is something Merkel about her.

The dynamic of politics, as the New Year approaches, is in some ways unexpected. The Coalition remains focused with a clear agenda and policies to give it effect. These policies may not be popular, but there is an aura of firm government and pursuing the national interest, even if there is argument as to what that best interest might be. The Tories are advancing in the polls; The Lib Dems, though battered by having to shoulder political responsibility after decades of saying whatever came to mind,  are no longer sinking and their leaders have been able to articulate the restraining roll they play in government.

Labour is flat lining in the doldrums and, save for a brief moment during phone hacking, looks pretty lacklustre. It has a major problem. The current politics of the U.K. and the world are driven by economic issues. The top team in Labour, Milliband, Balls and Cooper were all with Gordon Brown in the treasury for  their earlier political careers. During that period, the Treasury made the greatest miscalculations in all its history. The growth proclaimed as everlasting, was an illusion driven by unsustainable borrowing at every level, the gap between rich and poor grew to a chasm and the end of boom and bust turned into the biggest bust ever. Furthermore such was the dominance of the then Chancellor and and so long his feud with his Prime Minister, whose job he coveted, that only one credible figure emerged to take the economic reins as the crisis burst upon the world. He, Alastair Darling, has now retired from front bench politics.

This leaves Labour without a credible shadow chancellor and Balls talking unconvincing nonsense. The inability of this leadership team to capitalise on the extraordinary political opportunities available to the opposition, is directly related to their common apprenticeship and common responsibility for the crisis in the economy. The impact of Labour’s economic mismanagement was global, but every fool knows the epicentre of the crisis was London, even if the initial rupture occurred in New York. It is true that the Tories in power would have done no better and that many of the structural flaws and misguided political verities can be trace back to Thatcher. Nevertheless the Tories and their reluctant partners, the Lib Dems, have learned to do the sums, whilst the Treasury has come to its senses. Only Labour clings to the wild and hallucinatory notion that more government spending would make things come right.

Yet the opportunities for Labour remain. It is a simple menu. It must show it has a convincing plan for economic recovery which adds up and convinces markets from which, in government, it would have to borrow. It must show how it is going to close the gap between rich and poor. It must have a plan to re-balance the economy away from consumption and into production. It must show a route to full employment through wealth creating jobs which contribute to the coffers of the state and not one through employment  in quangos which sap those coffers dry. It must bring order and fairness to energy costs, banking, health and education. It must show it has developed a foreign policy which declines to go to some costly and counter productive war every time the Pentagon gets trigger happy.

There is more, but success with that list would be enough. All of it is challenging but possible, some of it is not even difficult. The voters are hungry for evidence that Labour knows what to do. The most extraordinary thing about 2011 was the failure of the Milliband leadership to demonstrate that it did indeed know what to do or to make pronouncements which were credible. This has proved a dreadful disappointment to millions. 2012 has to be the year when Labour got a grip of itself. Only then can it lay claim to getting a grip of the country.

The upcoming year is one of the most difficult to predict in terms of outcome. Instead this blog lists a few things which need to happen.

Eurozone We have to have some clarity here. The ECB has come up with some medium term loans for banks which were hoovered up by these cash strapped institutions, many of which are technically bust. This has bought time, but it has not ended the crisis. The various Euro councils, the EU Commission and the parliament have now to resolve their chronic inability to take decisions, or having taken them, to put them into effect. It is vital for the world that this incoherent and self made crisis begins to resolve in the early weeks of 2012. It will not be possible to conclude the project, but markets will be willing to go the mile if it is possible to discern in which direction. If, in the end, the Euro is going to unravel, we need to get on with it. Bumbling forward from one crisis summit to the next is a guarantee of stagnation.

Washington It is an election year, so fireworks are to be expected. What is new to the world is economic deadlock in the American political establishment, creating dysfunctional government of a kind which neither Americans, nor the rest of the world, are used to. There can be no reliable re-building of the busted economic model in the West until both Europe and America make up their minds about a way forward. If after November we are left with a split Congress and polarised confrontation about the economic way forward, it will be very bad indeed.

Iran This has thus far not been handled well or in a manner likely to yield a good ending. There has to be more engagement and a realistic understanding of just how far and how much states have a right to set agendas outside their borders. Tightening sanctions only strengthens the extremists in any government and offers little historic evidence of any useful progress. Engagement and trade empowers the people and only the Iranian people themselves have the authority and the power to determine a more constructive foreign policy for their country. Banning oil imports will most likely trigger another gulf war and inhibit the supply of oil. This will make a double dip recession a certainty for the entire western economic area.

The UK Coalition It needs to stick to its guns and continue with a robust plan to cut the deficit and cut the size of the state. it will need to be more radical about workplace regulations such as paternity leave, working time directives and so on, to make it easier to enable employers to create opportunities for work. It will also need to be more innovative in finding ways to boost British manufacturing and guard against a recovering founded on shopping with borrowed money.

Gradually irresistible logic and common sense are beginning to drive decisions. It is no longer assumed the euro will survive and everybody is now beginning to plan for its demise, if not totally, in its present form. If it does survive all countries remaining in it will have to adopt economic polices and rules set down by Germany, moderated by France. The euro zone will resemble politically something like the Austro-Hungarian Empire pre 1914. Franco- German domination of lesser nations, with a degree of autonomy but falling short of independent states or states with equal status. The deficit nations of the south will have to drop out, as the austerity required to remain in and repay their debts will cripple at least one, and may be more than one, generation in poverty.

The agreement on a new treaty, vetoed by Cameron, which then became an agreement by 26 out 0f 27, is already unravelling and is politically untenable. The problem, spotted by the ratings agencies and declared by one of them, is that, having failed to set up at the beginning the fiscal union required to run a currency because it could not be agreed, it remains impossible still. Some fudge will not work. Moreover there is a complete absence of any meaningful money for future bail outs and major defaults or haircuts are now certain. Nobody is going to lend to such uncertainty and confusion. When politicians or officials from the euro zone are interviewed in the new heightened political atmosphere, they are at best unconvincing and at worst talking nonsense.

Britain has her own problems on which she must now work with renewed vigour. The reconstruction of the banks and the intended proper fiscal rules for mortgages, both announced today are moves in the right direction. Getting manufacturing going remains a challenge. Europe in difficulties was not part of the plan. Not so the Germans. They already export more to the BRIC countries than they do to Europe. We send half our goods to Europe, and of that the proportion we send to Ireland is more than we sell to all the BRIC countries put together. At least we are starting form the very depths and the sky is the limit. Whether we can reach for it is another matter.

The fallout form the Veto continues. Of much greater importance is the outcome of the summit itself. This may turn out to be the last summit at which there was any prospect for the survival of the Euro.

Looking back since the crash and especially over the last two years there has been meeting after meeting at which everything is said to be put right, yet nothing is. Action is not taken when agreed, funds without money are created, threats are issued and so on. The latest is clearly not enough to do any good.  It does not empower the ECB to function as a normal central bank at the heart of a normal currency and no mechanism exists for the zone to issue universal bonds to finance itself.  It cannot do this because there is no coherent political structure from which the ECB can draw its authority. There is just a collection of treaties and protocols. These restrict, they do not empower. Moreover the proposal that the the European Commission shall have oversight of all Eurozone budgets, perhaps to include non Euro volunteers, is counter democratic. Under pressure from angry voters in countries whose plans are thwarted, such an arrangement cannot stand.

The EU now faces a crisis on several fronts. The first is that it is attempting to fill the absence of proper democratic institutions for fiscal governance with those which are profoundly undemocratic. This requires of  member countries not only a surrender of sovereignty, but to surrender it to an unelected authority. This is untenable. Next many of its members are so over borrowed they are about to go bust, the markets will not lend them any more money and without rescue they are headed for disorderly default. On top of that the financial institutions which the euro represents as a currency are now seen to be utterly dysfunctional. Finally the resolve to re-organise to put things right is beyond the capacity of the politicians now leading the various member countries.

On the scale of this gathering calamity, Cameron’s veto is nether here nor there. Save for this. None of the countries have any experience of running a reserve currency. Britain has. None of the countries have old established democracies evolved over centuries. Britain has. None of the countries has a financial sector of world class. Britain has. Put simply, the only country with the skills to solve the crisis is Britain. If we had joined the Euro it would have been set up differently, that would have been our price. This crisis would never have arrived. It is, this blog now believes, difficult to see a solution which will save the Euro, without British expertise. The tragedy of the veto is that, not for the first time, Europe needs Britain as much as  Britain needs Europe.

What Britain now has to assess and this includes the Eurosceptics, is whether our economy can stand the disintegration of the euro. Plans are being prepared. A 10% shrinkage in economic activity is projected. Is that what the Tory party wants? It may not prove popular, especially among the professional classes whose standard of living would be shattered and assets decimated. That may not prove a good election platform.

It is certainly true that we became so beguiled by our financial services that we allowed our industrial capacity to shrink below survival level and that this decline has taken place in the period since we joined the Common Market in 1972. If we came out of the EU we would be forced to regenerate our manufacturing sector to at least three times its present capacity and to find innovative in ways to do this. We would also need the capacity to raise the capital to finance it and to continue to attract inward investment. This may not be impossible, but it is a very big call and not one we could have a hope of answering with our economy in its present state of over borrowed and deficit crisis. The option for Britain to vote in a referendum to leave the EU is only realistic, if the EU is first restored to health and the world economy can offer the opportunities to Britain it would need to prosper on its own. At present the West is so weighed down by debt that growth will be impossible. It may not be the clever moment to stand alone.

This dynamics surrounding this unexpected move by Cameron, taken in the middle of the night, following a long day, are still rather obscure. In the end it looks as if he felt he had to do something to appease the huge eurosceptic wing of his party.

It would surely have been better to say that Britain saw its over-riding national interest as the survival of the euro and the restoration of growth and stability in the single market and although he was anxious about some aspects, Britain would join in and play its full part in the preparations for restoring world confidence in the single currency. He could have added the caveat that the treaty resulting may very well have to be put to the British people in a referendum and if it were seen that any of its provisions was harmful or vexatious to British interests, the voters would say NO. This would have given Britain considerable political capital and at the same time a not inconsiderable say in the provisions of the treaty.

He has come away with nothing but the praise of those who think we would be better off out of Europe anyway. It may be that Britain is temperamentally better suited to a free market with the U.S., or even going it alone. However this can only come into prospect when the EU is restored to equilibrium and our financial position is vastly improved. Meanwhile we are members of a club, which brings us great benefits in trade and influence and as with all members of joint undertakings everywhere, we have to put the interests of the club as a whole above our own personal interests.

We cannot yet tell how this is going to turn out. We do know that nothing constructive came out of the summit to deal with the near and pressing crisis of confidence and liquidity, which if not resolved will sink the whole thing, whatever treaties are in prospect. We are reminded, when listening to the eurosceptic Tories, of the Confederate zealots in 1861, who celebrated the bombardment of Fort Sumter, which inaugurated the American Civil War. The Southerners were convinced they would win the war and secure their independence. They mis-judged world opinion and their own strength. In the end they lost the war, their independence and 75% of their wealth as well as most of their GDP. Things do not always work out as expected.

It is too early to tell whether the veto will be to Cameron as Munich was to Chamberlain, Suez to Eden and Iraq to Blair. Cameron himself will be hoping that it will be to him as the Falklands to Thatcher. In fact the events to come may be of such magnitude that it will be forgotten about altogether.

The dynamics of these historic events are now too fluid for any prediction of the outcome. The latest declaration by France and Germany about the need for a treaty change and closer economic integration is to state the obvious cause of the crisis, but it useless to resolve it. This is because this is not now a crisis of a currency with a ramshackle method of management. Because of that failure, there is now a sovereign debt crisis in which a large number of countries individually and many individuals within them, have borrowed more than it is mathematically possible to repay. Collectively the problem affects the entire western economic system.

This cannot be wished away with a new treaty. Neither can borrowing more or even borrowing more cheaply solve the long term problem. There are two separate issues. One is countries running budget deficits; the other is repaying the accumulated borrowing. So great have the figures become that the economies and cuts required to cut the deficits are such that growth is rendered impossible. This will make the accumulated debt mountains and the cost of servicing them unsustainable for everyone.

That is because even those now managing, and this includes Germany, do not have enough reserves or credit worthiness to cope with the cost of the collateral damage of defaults by Spain, Ireland,Italy Greece and Portugal and the consequent insolvency of most of Europe’s banks. If these countries muddle forward without defaulting, the consequent squeeze on economic activity for years and years will push the others into the red beyond the level at which they can cope. It is just like the weight of water in the Titanic spilling over from one watertight compartment to another, until the whole thing went under. The only solution was a redesign (which happened to the Olympic) but once the disaster had happened it was too late.

It goes without saying that if the euro survives it must have the framework for a currency to function and this will involve pooled sovereignty from its members. It also goes without saying that in future all states in the west must pay for their needs by investing the savings of their citizens, made from earnings in the creation of wealth, in their collective future and that this cannot be done by borrowing. Money cannot be made. It must be earned. Any suggestion that all that is required is to sit in a deck chair watching the value of property grow and grow and everything can be enjoyed by borrowing against its value, is now proved to be as barmy as the notion that pigs can fly.

The question now is whether there is a route open to allow everyone a chance to start again on a better path; in other words will the opportunity be there to put the clever new treaties and lessons wisely learned into effect? The core of the crisis is the uncertainty of being able to answer yes with any confidence. That is why the ratings agencies have issued their warning. It is also why this blog believes that the west is headed inexorably for a general default and the east is facing a dramatic call on its savings. The west has allowed its greed and lack of realism to create a catastrophic imbalance in the world economy. Unless some correction eventually occurs in that imbalance, the future offers only a long dark night of depression and stagnation.

The reason why we have arguments about pensions is because there is an unreal approach to a benefit which should not be the financial responsibility of the state at all. Neither should private companies be required or expected to contribute to employee retirement schemes. Instead there should be universal reform on these lines.

Every worker in whatever sector should be required by law to contribute a minimum amount to an individual pension fund. Employees would be free to contribute more than the minimum  to a certain maximum. Funds would to have to be of an approved standard but could be offered by normal providers in the financial services industry. The state could hold a minority of shares in propriety companies so as to draw profits back to taxpayers and there could be mutual providers also. An individual fund could be moved from one company to another without significant penalty, but it would remain the property of the employee. Employees could change jobs without any impact on the fund whatsoever. Contribution maximum and minimum levels would vary with age. The outcome at the end would not be related to earnings but to the value of the fund. This would be universal for all employees.

The vast investment funds which this would generate could provide a capital pool for investment in national projects. Employer’s costs would be significantly reduced allowing for improved salaries, wages and working conditions for the low to middle earners. The universal state OAP would remain as a baseline and could be increased to a level so that other benefits would not be necessary. This could be paid for by withdrawing the benefit pound by pound for all those on retirement income exceeding a certain level, say £75,000 per year.

Not only would this stop all the arguments in the public sector (save for the fact that the union leaders would probably strike themselves into oblivion when the change took place) but it would significantly improve the prospects for the private sector employees, where pension provision is now haphazard and some of the schemes on offer a waste of money. It would detach both the government and employers from a sector of people’s lives where they have no place to be and which both have exploited to the detriment of individuals personally and the nation’s well-being as a whole.

Finally it would set the nation on a path where growth came not from borrowing on international markets but from investment from within. This is how it used to be before financial orthodoxy went off the rails. This may be blue sky thinking, but remember it is from blue sky that the sun shines.