In order to get a handle on what’s ahead for the Western, industrialised economies, INSEAD economics professor Antonio Fatas looks back ten and twenty years.

“If you think back to the 2001 and also to the 1991 recessions, we saw the United States taking off and then Europe recovering about a year later,” he says. “It is possible that we will see a repeat of that in this coming year.”

Fatas maintains his stance despite the downgrade on January 13 by Standard and Poor’s (S&P) of the credit worthiness of France, Austria and seven other Eurozone nations (Malta, Italy, Spain, Slovenia, Portugal and Cyprus). "This downgrade was not “news”; we expected it. The European Financial Stability Fund would have a harder time raising money, but this move won't change much - not policy or actions or the economy. Look at what happened last year when the U.S. credit worthiness was downgraded: nothing."

But while the S&P downgrade may have been expected, the breakdown of Greek restructuring talks was a bad surprise to markets unprepared for a disorderly default of an industrialised country.

Yet, just before the holidays, there were positive economic signs which rallied the market: the European Central Bank signalled its intention to be more aggressive than expected in its support of the euro – providing liquidity to the Eurozone’s banks by committing to spend some 500-billion euros to buy government bonds from commercial banks. “The euro debt crisis (in both the region and the currency) is coming under control,” he says. “It may not be solved in the next six months but we’re getting there.” The sale of debt offerings in Italy and Spain early in January went well, and bond yields had been showing signs of improvement, adding some support to Fatas’s more positive prophecy.

He takes a long-term view on currency exchange rates, particularly euro/dollar. “Shortly after the euro was launched (entering the market as a real currency in people’s pockets in 2002) a wave of pessimism hit and the euro dropped to around 85-centimes against the U.S. dollar. So there are waves pushing against both currencies. The euro is now around $1.27, which is not low for the euro historically; financial markets seem to believe it will keep going down. And indeed if the U.S. surprises us with good economic performance; this will put downward pressure on the euro.

In the wake of the S&P downgrade, there was indeed downward pressure on the euro and global stock markets: on January 16 (U.S. markets were closed for Martin Luther King Day), the euro slipped to 17-month lows, and to 11-year lows against the Japanese yen. The fear of contagion in the banking sector hit not just the French markets, but the U.K. and U.S. as well. Markets in China, Hong Kong and Taiwan all closed down more than 1 percent on Monday. Gold ticked up.

"It's all cycles," continues Fatas. "There is uncertainty in Europe; once in a while we will see crises in emerging markets and this will affect economic recovery." So, it seems, will politics, but with elections looming in both France and the U.S., Fatas isn't expecting any surprises this year.

"The worst thing is if we start on another downward spiral of confidence. But I am hopeful that we are moving away from that type of risk."