Meanwhile, even if Obama's Republican opponents do not push the country over the fiscal cliff of automatic tax increases and spending cuts on Jan 1, they will ensure that America's own form of mild austerity will continue. Public-sector employment is now roughly 600,000 below its pre-crisis level, while normal expansion would have meant 1.2 million additional jobs, implying a public-sector jobs deficit of almost 2 million.

But the real risk for the global economy is in Europe. Spain and Greece are in depression, with no hope of recovery in sight. The eurozone's "fiscal compact" is no solution, and the European Central Bank's purchases of sovereign debt are at most a temporary palliative. If the ECB imposes further austerity conditions, as it seems to be demanding of Greece and Spain, in exchange for financing, the cure will only worsen the patient's condition.

Likewise, common European banking supervision will not suffice to prevent the continuing exodus of funds from the afflicted countries. That requires an adequate common deposit-insurance scheme, which the northern European countries have said is not in the cards anytime soon. While European leaders have repeatedly done what previously seemed unthinkable, their responses have been out of synch with markets. They have consistently underestimated their austerity programs' adverse effects and overestimated the benefits of their institutional adjustments.

The impact of the ECB's 1 trillion ($1.3 trillion), long-term refinancing operation, which loaned money to commercial banks to buy sovereign bonds, a bootstrap operation that seemed as peculiar as the ECB's financing of sovereigns to shore up the banks, was impressively short-lived. Europe's leaders have recognized that the debt crisis in the periphery will only worsen in the absence of growth, and they have even, sometimes, recognized that austerity will not help on that front; nonetheless, they have failed to deliver an effective growth package.

The depression that European authorities have imposed on Spain and Greece already is having political consequences. In Spain, independence movements, especially in Catalonia, have revived, while neo-Nazism is on the march in Greece. The euro, created for the avowed purpose of fostering the integration of a democratic Europe, is having precisely the opposite effect.

The lesson is that politics and economics are inseparable. Markets on their own may be neither efficient nor stable, but the politics of deregulation gave scope to unprecedented excesses that led to asset bubbles and the rolling crisis that has followed their collapse.

And the politics of crisis has led to responses that are far from adequate. Banks have been saved, but the underlying problems were left to fester - no surprise there, given that, in both Europe and America, the task of fixing them was assigned to the policymakers who had caused them. In Europe, it was politics, not economics, that drove the creation of the euro; and it was politics that led to a fundamentally flawed structure that created ample room for bubbles, but little scope for dealing with the aftermath.

To forecast 2013 is to predict how divided government in the US and a divided Europe respond to their respective crises. Economists' crystal balls are always cloudy, but those of political scientists are even cloudier. That said, the US will probably muddle through another year, neither pushed over the cliff nor put on the road to robust recovery. But, on both sides of the Atlantic, the polarized politics of bravado and brinkmanship will be much in evidence. The problem with brinkmanship is that, sometimes, one does go over the brink.

The author, a Nobel laureate in economics, is university professor at Columbia University.

Project Syndicate

(China Daily 12/24/2012 page9)