Whether Europe's most troubled economies have the political will to tackle record deficits will preoccupy investors in Western Europe in 2010, along with Britain's election and potential overspill from emerging market crises.
With unemployment rising, the continent could face a growing risk of social unrest as well as further government intervention in the private sector, both legacies of the economic crisis.
DEFICITS, AUSTERITY MEASURES AND PIIGS
Greece's attempt to reassure markets by cutting public spending while placating left-wing voters is an early example of a key theme in West European politics this year as governments wind down stimulus packages and move towards austerity.
The euro zone's weakest economies -- the so-called PIIGS of Portugal, Italy, Ireland, Greece and Spain -- face the biggest challenge, although each is approaching the crisis differently.
Trouble in one could affect sentiment towards the wider Eurozone EUR=.
Ireland has won praise for brutal cuts that have angered public employees, while credit rating agencies say Greece is not doing enough to reduce its debt mountain.
What to watch:
-- Do bond markets continued to pressure the PIIGS?
-- Will markets be satisfied with a new round of Greek austerity measures expected to be outlined this month?
-- Credit ratings moves. In the absence of any external arbiter such as the IMF or World Bank in the euro zone, the agencies have acquired much greater importance and look to be on a collision course with Spain and Portugal as well as Greece.
-- Comments from German or other EU policymakers on potential support for peripheral states in the event of a crisis. Markets broadly assume an implied guarantee but would need reassurance in the event of a market slump.
-- Is there a political backlash against central banks as they begin to withdraw billions of dollars in stimulus support?
British Prime Minister Gordon Brown must call elections before June, with the prospect of political instability and policy uncertainty already unnerving markets, particularly sterling GBP=.
With Britain's credit rating potentially under pressure if it does not address its budget deficit, markets want more policy clarity from the expected victors -- Conservative party leader David Cameron and his finance chief, George Osborne.
Opinion polls late last year showed the Conservative lead over Labour narrowing, raising the prospect of either a hung parliament with no overall majority, that could make decisive government all but impossible.
What to watch:
-- When does the election come? Most predict early May, but a narrowing poll gap prompted media speculation of an earlier vote. Brown promises a budget first, meaning it will be after March.
-- Does the Conservative poll lead narrow? If it does, markets will have to factor in a greater chance of a hung parliament and that could hit the pound.
-- Does the economy recover? Brown will be hoping for a visibly recovering economy to boost his re-election chances.
-- Post-election ratings action. Ratings agencies look unlikely to move before, but could take swift measures after if they do not believe the deficit is coming under control.
UNREST AND POPULISM
High unemployment coupled with almost continent-wide public spending cuts -- as well savings measures at private firms -- look likely to boost social and industrial unrest particularly in Western Europe, where austerity measures will generally begin in 2010.
Greek trade unions have already called strikes in protest against the government's latest cuts, while British Airways (BAY.L) and other firms have had to battle threatened strike action.
Social unrest in emerging Europe -- which had to cut spending much earlier to conform to IMF and EU bailout conditions -- has risen less sharply than many predicted.
To avoid widespread disruption, governments will be keen to take popular steps to stem discontent -- for example, by targeting bankers' bonuses (see below).
What to watch:
-- What happens to unrest in Greece. Recent protests have been far less severe than widespread youth riots last year. A bellwether for other countries?
-- Heightened industrial unrest in Britain both in the run-up to elections and after any transition to a Conservative administration.
INTERVENTION IN PRIVATE SECTOR
Austria's nationalisation of Hypo Group Alpe Adria [ID:nLDE5BD00D] -- for fear that its collapse might spark a Lehman effect in emerging Europe-- is a reminder that state intervention in the private sector remains high.
France, Britain, Greece and others have tapped into public anger to tax bankers' bonuses despite warnings that it could undermine their financial sectors.
The saga of General Motors' GM.N restructuring of its European operations -- closely watched by governments across the region -- may be reaching its end, but other industrial stories are only just beginning.
Possibly mindful of marginal constituencies in the British Midlands ahead of next year's election, Business Secretary Peter Mandelson has weighed into the potential takeover or job firm Cadbury by US giant Kraft, arguing the state-funded Royal Bank of Scotland should not be backing the purchase.
What to watch:
-- A likely increase in rhetoric from policymakers across a range of private sector industries.
-- Are one-off taxes against banks repeated, and are there any serious signs of financiers fleeing London and Paris for other centres?
Nearby emerging markets offer a range of risks that could easily spill over into Western Europe, with the risk of further defaults or restructuring from Ukraine and Dubai top of the list. Both are essentially political decisions by ruling elites.
Several faltering IMF deals in Eastern Europe that are hostage to domestic politics could spark turmoil that might hurt European banks and potentially even drag down the euro EUR=.
What to watch:
-- How much support does Dubai get from fellow emirate Abu Dhabi?
-- Does Ukraine's January 17 presidential election lead to more political stability, or are parliamentary elections going to prolong paralysis well into next year?
-- Does Latvia's government collapse in the run-up to October parliamentary elections, potentially prompting a new crisis and threatening its currency peg?