Analysis

Europe’s Age of Austerity Drawing to a Close?

Elections in France and Greece could thwart Europe’s emphasis on fiscal consolidation.

Shivers are running down the spines of Europe’s champions of austerity. If, as expected, socialist François Hollande wins France’s presidential election on Sunday and the Greeks return a parliament that is hopelessly divided on the same day, the pressure on Germany and its allies to surrender the push for budget restraint and allow for more deficit spending will increase.

Hollande has pledged to renegotiate the European fiscal compact that was signed in December — but has yet to be ratified in all eurozone states. The main conservative and socialists parties in Greece will likely fail to achieve a majority, forcing them to enter a coalition with third parties that mostly hostile to the austerity effort.

The Greeks have had to endure the worst of Europe’s debt crisis. In exchange for two international bailouts, totaling €240 billion, Athens has had to implement spending cuts and enact market reforms. Salaries in the private but especially the public sector were cut. So were pension payments and government subsidies.

Anticipating public resistance to mere budget cuts, Europe’s leaders in January stressed competitiveness in their fiscal treaty besides fiscal consolidation. Deficits had to reduced to under 3 percent of gross domestic product with fines for profligate member states but highly indebted governments in the periphery of the single currency area were also expected to liberalize their economies.

Italy, where former European commissioner Mario Monti became prime minister in November, has led the way. His technocratic government cut spending and raised taxes to balance its budget but also introduced entitlement and labor market reforms, the effect of which will take years to gauge as the country is burdened by excessive regulations, a mammoth bureaucracy and powerful trade unions that resist Monti’s efforts.

The conditions in France are fairly similar except taxes are even higher and the state claims an even larger share of annual economic output. Unlike Monti, Socialist Party presidential candidate François Hollande has displayed no willingness to meet market demand for flexibility and spending restraint. Instead, he promises to hire more civil servants and raise taxes on the rich.

Hollande’s push is one for “growth.” It is the European left’s newest buzzword for more government spending, implying that a recovery can only came about as a result of public “investments” — financed by borrowing.

When the British complained in January that the fiscal compact, heralded by German chancellor Angela Merkel, “essentially makes Keynesianism illegal,” they were isolated. Prime Minister David Cameron was one of two European leaders who opposed the treaty. The Czechs also vetoed. Neither country is in the eurozone so the fiscal compact could go ahead regardless.

Now, the call to end austerity is heard louder across the continent. Rallying against supposed “cuts” in government programs and spending — which is usually a euphemism for reductions in planned increases in spending; in few countries have outlays actually come down — left-wing political parties and labor unions are forcing even right-wing leaders to make concessions.

In the Netherlands, liberal prime minister Mark Rutte’s minority government, otherwise a stalwart German ally, had to forego some planned spending cuts and raise taxes instead to appease a centrist coalition that was willing to support a budget that will reduce the country’s shortfall to under 3 percent of GDP next year.

In Italy and Spain, conservative prime ministers are urging further flexibility on the part of the European Central Bank to finance their deficit spending. The central bank in Frankfurt purchased billions worth of peripheral bonds late last year when interest rates on Italian and Spanish debt rose over 7 percent, deemed unsustainable. This temporarily calmed markets but is far from a permanent fix. France’s Hollande also likes to see a more activist central bank.

The Germans, for their part, remain skeptical. “It’s important that we get away from the idea that it always costs money to get economic growth,” Merkel told the Hamburger Abendblatt on Tuesday.

One comment

  1. Once more, it is difficult to blame Hollande and others’ plea for measures encouraging growth, given to austerity revealing itself ineffective and even dangerous for fragile economies. Spain in that matter is a sad example.
    The assumption that the oh-so-marvelously-rationnal-and-self-controled-market-which-will-lead-us-to-paradize is supporting austerity is also revealing itself wrong. After freaking out about state debts in Europe, a new panic attack is threatening while Italy and Spain are scrupulously setting up the required measures… with indeed few results.
    Maybe Germany should consider that beyond the fact that its politics is discplined, its economic strength is mostly dependent on other European countries capable of buying its products. Among these countries, Spain, Italy and France are the most important ones.Hence, if austerity leads Greece, then Spain and why not Itlay to quit the Eurozone because of unsustainable internal pressure, neither Germany, nor the rest of Europe will easily survive it.
    If, by any chance Die Königerin Merkel finally accepts to slightly alter the rules of the European Central Bank, maybe some already endangered countries won’t have to borrow at more than 6% anymore… this would maybe lead to a little inflation, yes, but will considerably release the pressure for governments desperatly seeking a little flexibility… and may very well avoid Germany, once more, to pay for the rest of Europe. At least it will avoid Europe to collapse on itself because of economical blindness.

Comments are automatically closed after one year.