Archive for May 8th, 2012
Socialist François Hollande defeated conservative Nicolas Sarkozy 52% to 48% to bring the Socialists back into the Presidency for the first time since François Mitterrand left office in 1995. Angela Merkel’s partnership with Sarkozy – Merkozy, as it was called, had defined the plans to save the Euro and prevent the financial crisis from escalating. Now that is in doubt.
Meanwhile in Greece elections look to show the two main parties, PASOK and New Democracy, could well fall short of having the capacity to build a coalition. They are the only parties supportive of the bailout plan for Greece. The rise of the far left and far right against the plan suggests that Greece could face a future without the Euro, especially if Hollande scuttles the “Merkozy” plans. Financial markets in Europe are gripped with uncertainty as the Euro falls in value from about $1.33 to $1.29. What does this mean?
Americans and Brits tend to look at the EU with a jaundiced eye. Americans especially don’t get it. They don’t see how countries can link their destinies like that. Others don’t like the EU and want it to fail so they hyperventilate over every crisis or bit of bad news. That’s been going on for nearly 55 years and so far the EU has managed to grow and expand rather than fail. Talk of the EU collapsing or even the Euro disappearing are way overblown. The EU is not in danger, and the worst I can imagine for the Euro is that the number of participants could decrease by one or two.
What this means is that the Europeans will shift from an austerity focused German led recovery effort to one that is more nuanced and willing to challenge financial markets and big banks. Austerity hasn’t been working out too well anyway. Germany’s been the healthiest but Great Britain’s austerity has caused a second dip into recession and Greece is enduring a downward spiral. The German economy is fundamentally healthier than others in Europe (and arguably our own), so they’ve avoided that kind of pain.
Ultimately, a shift away from a Germanocentric policy is good for the EU. German led austerity is not sustainable. It will lead to resentment of the Germans, anger at the politicians, and the rise of the far right and far left. Hollande will force Merkel into a partnership of the right and the left, and that’s always been good for Europe.
Consider: Social Democrat Helmut Schmidt and conservative Valery Giscard D’estaing helped put aside the crises of the 70s and forge a stronger community. Conservative Helmut Kohl and Socialist François Mitterrand were the forces behind the creation of the Euro and the expansion of the EU. Europe does best when its Franco-German engine powers a vehicle with a wheel on the right side and one on the left. Both wheels on one side make it unstable.
François Hollande is not a raging ideologue. His first moves after the election was to contact Merkel, assure financial markets, and receive an invitation from President Obama to visit the US. As President Obama learned, it’s easy to rail against the system when you’re on the outside; once you have power there are many subtleties of policy that have to be considered.
Expect Hollande to fortify the resolve of those who want to reject austerity as the primary policy for the EU. It’s not that there isn’t a debt problem; Hollande notes openly that at 80% of debt to GDP, France has a debt problem. Rather, solving that and getting out of this crisis by focusing on austerity and budget cuts alone is economic foolishness.
Merkel and the Germans are very influenced by economic theories that emphasize avoiding debt and accepting recession as “necessary medicine” to correct economic imbalances. To them high debt precipitated this crisis and it will not end until debt is reduced and a proper balance is restored to the economy.
Hollande and others argue that a country in recession could be unable to get out of it if there isn’t something to stimulate economic growth. One can imagine setting budget priorities to stimulate growth but cut unproductive spending.
This is not in direct opposition to Merkel. Germany’s success has focused on stimulating job creation in other ways and restructuring the German economy. She has never proposed austerity along as a solution; rather, budget cuts and debt reduction have to be part of a broad range of plans. This means there are plenty of areas for Hollande and Merkel to find common ground.
Moreover, Hollande’s approach requires international cooperation. No one state alone can handle this, the EU and even cooperation between the EU and the US is more important than ever. The problem is to assure currency stability despite high debts and the messy process of economic rebalancing. For Hollande would throw a grenade into the works of the EU would be self-defeating and he knows that.
On top of that, Merkel faces an election in 2013, and her party has been hurt in recent state wide elections in Germany. The political reality within Germany suggests that she needs to take into account the need to take seriously the negative implications of budget cutting alone. Germany’s economy has been the envy of the industrialized world since the crisis started in 2008, but austerity within the EU would drive down demand for German exports and could cause a contagion recession for Germany.
Up until now the EU has had an unsustainable plan to handle the impact of the financial crisis. It’s relied on German money and German leadership but hasn’t addressed the need for countries who have had inferior economic policies to rejuvenate growth as part of the solution. The focus has been too much on debt reduction and too little on the costs of austerity. With Cameron’s UK sinking into a double dip recession, his “debt reduction first” model is in severe doubt.
François Hollande is in a position to help nudge Merkel and the EU into a more broadly accepted path forward. If the Greeks don’t want to participate, fine — let them have the drachma back. At this point European banks are better prepared for a Greek default than they were a year ago, the system can handle it. If that happens, the inevitable disaster that will hit Greece will pressure other troubled states to avoid the Greek way. That, plus a set of policies more sensitive to the dangers of austerity will make it an easier sell. Contrary to conventional wisdom, Hollande’s election will aid EU efforts to handle this crisis, help stymie the rise of the far left and far right, and may push Merkel in a direction that will help her win re-election.