Optimism is in the air, particularly in financial markets. And some cautious optimism may indeed be justified.
Compared to where we were at the same time last year, acute risks have decreased. The US has avoided the fiscal cliff, and the euro explosion in Europe did not occur. And uncertainty is lower.
But we should be under no illusion. There remain considerable challenges ahead. And the recovery continues to be slow, indeed much too slow.
Put poetically: We may have avoided the cliffs. But we still face high mountains.
A year ago, we were worried about two short-term risks:
We were worried that gridlock might lead to excess fiscal consolidation in the US. And that firewalls in Europe may not be strong enough to prevent a crisis in Spain or Italy.
The agreement reached at the end of 2012 in the US does not solve the fiscal problems, but the extent of fiscal consolidation in 2013 should be roughly appropriate.
In Europe, progress on a number of fronts, from the Outright Monetary Transaction programme put in place by the ECB to buy government bonds on a conditional basis, to the start of a banking union, has convinced financial markets that the firewall was indeed there, and that Europe was committed to the euro.
Still, we have not yet turned the page. The world recovery continues to be hampered by the need for fiscal consolidation – the reduction of government debt and deficits – and by a still-weak financial system.