Wednesday, 9 May 2012

Angela vs. the growth

As predicted, Socialist Francois Hollande ousted the centre-right Nicolas Sarkozy in French elections on Sunday after a campaign in which he railed against the German-led austerity drive in Europe. He has insisted that Europe needs to end its obsession with austerity to dig its way out of the debt crisis, and instead focus on growth.

Coming as it did on the same day that anti-austerity parties in Greece took a majority of the vote, Sunday has been interpreted as a Europe-wide rejection of German Chancellor Angela Merkel and her insistence on austerity and budget cuts. The markets have certainly interpreted it as such. Stock exchanges across the world have taken a dive the last three days, particularly in Europe, over fears that the delicately crafted ‘fiscal union pact’ worked out over the past several months is now about to fall apart.

Whether that actually comes to pass may depend less on Hollande than on how his victory is interpreted in other European capitals. All eyes will be on the new French president’s first meeting with Merkel next week, a day after he is sworn in on 15 May. It is in both of their interests that the meeting goes well. Hollande needs to walk away with something to say that he “renegotiated” the fiscal compact, while Angela needs to reassure the German people that Eurozone countries will still have to adhere to strict budgetary rule while at the same time reassuring the markets that there will be no Franco-German rift.

What will likely be worked out is the addition of a paragraph about stimulating the economy into the compact – something that wouldn’t require new ratifications by national parliaments.

But leaders from other EU countries who are unhappy with the austerity regime, as well as the leaders of the European Commission, will be keenly watching Hollande for a sign that there is about to be an aggressive anti-austerity rally. The Spanish and Italian prime ministers, who are known to be unhappy about the austerity-only approach, have been tight-lipped since Sunday. So has European Commission President (and former Portuguese prime minister) Jose Manuel Barroso, who has been wanting more of a growth strategy for some time but has been stymied by the powerful Merkozy alliance. Italian prime minister Mario Monti seems keen to form a pro-growth (and maybe anti-German?) alliance with Hollande.

But these potential allies can’t speak out against ‘Merkelism’ until they know that Hollande is the champion they’ve been waiting for – and that is not yet clear. The Greeks are also watching Hollande for a sign that he will come to their rescue and relieve them from the onerous cuts Merkozy imposed on them. Opposition leaders from the Left in countries like the UK and the Netherlands are also looking keenly for a further crack in the EU’s centre-right dominance.

The first key test of whether Hollande is spoiling for a fight will be who he appoints as prime minister following the French parliament elections this summer. If he picks Jean-Marc Ayrault, who speaks German and has close ties to France’s eastern neighbour, it will be seen as a conciliatory gesture to Merkel. If he picks the Socialist firebrand Martine Aubry, the creator of France’s 35-hour work week, it would be a confrontational signal to Merkel.

Angela says no

Even if Hollande is spoiling for a fight (all indications are that he isn’t), the German chancellor is no pushover. Following the Socialist victory in France the reaction from Merkel and her cabinet was swift and clear: there can be no change in the fiscal austerity pact agreed by Eurozone states earlier this year.

Her allies said that any stimulus program in France would have to be financed by the German taxpayer, and the German public would not accept that. "Germans could end up paying for the Socialist victory in France with more guarantees, more money. And that is not acceptable," Volker Kauder, the parliamentary leader of Merkel's conservative party, told Reuters. "Germany is not here to finance French election promises."

Hollande wants to pay for the stimulus to pull Europe out of the crisis by issuing joint euro zone bonds and cash injections from the European Central Bank. But Germany has long stood firm in resisting this, both out of complaints that it would be Germany backing those bonds and out of fears of inflation if the ECB prints more money.

But the longer the crisis has dragged on, the more Germany seems to be losing the economic debate. Europe has delivered its austerity medicine for almost four years, but the patient has only gotten worse. Meanwhile the US under Barack Obama and George W. Bush before him has pursued the opposite strategy, a policy of stimulus to revive the economy. Now the US is out of the recession and has returned to growth, while Europe’s economy is in dire straights. Chris Hayes did a good job of explaining this Monday night on MSNBC.

The people of Europe are growing impatient with the austerity regime, and this was reflected in Sunday’s elections. How much longer can Germany insist on its course while the economic evidence seems to suggest it is only making things more painful? Many in Europe are now waiting for a white knight to ride in and lead them in a different course. But so far, no such hero has emerged. Hollande seems an unlikely figure to fit in the armor.

1 comment:

Captain Kid said...

You forgot to mention that Merkel used a policy of stimulus for Germany back then to revive the economy. In 2009, she introduced the so called "Konjunkturpaket II", which worked very well.
She is prescribing a medicine she considered not good enough for herself two and a half years ago.