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European voters clear: Austerity won’t be tolerated
Still in recession after hard-line tactics
Question of the Day
Europe’s election results were a stinging rebuke for the belt-tightening measures instigated throughout the European Union at the behest of Germany in recent years, while they make U.S. policies that have emphasized growth over austerity look enlightened by comparison, analysts say.
U.S. tax cuts and stimulus measures, coupled with a modicum of budget cuts, have nurtured a modest but steady expansion since 2009 while much of Europe’s economy is in stagnation or sharp decline as nations adopted deep budget cuts and tax increases to try to stem their red tide of debt.
Voters in France, Greece and elsewhere this weekend signaled their weariness with such austerity measures and the economic hardship they have spawned, leading to the defeat of conservative French President Nicolas Sarkozy by Socialist Francois Hollande and the wholesale ouster of Greece’s two major parties among other revolutionary developments at the polls.
The results are expected to force Germany and its allies in northern Europe to embrace more growth-enhancing policies to address the deep recessions that have taken hold in the debt-stricken countries on the southern rim of Europe, vindicating the approach urged for years by the Obama administration but spurned repeatedly by budget hawks in Berlin.
“President Obama has long argued for an EU approach to the financial crisis that focuses on stimulus and not just austerity,” said Charles A. Kupchan, senior fellow at the Council on Foreign Relations. “The White House would surely welcome some Keynesian pump-priming on the other side of the Atlantic.”
German Chancellor Angela Merkel is scheduled to meet with Mr. Hollande and other European leaders in coming weeks to discuss ways to try to promote growth in Europe. Germany’s own economy has remained strong, though the export-oriented growth there has done little to ease the recession in its southern neighbors.
Analysts say the problem is that nations like France, Italy and Greece have reached the limits of how much they can borrow and spend without driving up interest rates to unaffordable levels, leaving them little room to try to stimulate their economies through such conventional measures as tax cuts and increased infrastructure spending.
“Hollande’s focus on stimulus might exacerbate rather than improve France’s fiscal situation, unsettling the markets,” and thus backfiring, Mr. Kupchan said. “France’s public spending as a share of output is the highest within the eurozone, and its debt burden is already worrying. If the numbers worsen, the eurozone might face another round of financial crises.”
France and many southern European nations now live in a “post-Keynesian” world where conventional stimulus is no longer available to them because of their unsustainably high debt levels, Morgan Stanley economists said.
Such debt-strapped nations would have to use unconventional measures such as vigorous deregulation and privatization of their bloated government sectors to try to stimulate growth, the economists said.
Mr. Hollande is expected to try to persuade Mrs. Merkel to soften Germany’s stance against creating debt instruments — so-called “euro-bonds” that would be backed by Germany and other fiscally solvent nations — to finance growth-stimulating infrastructure projects in their neighbors.
France and other debt-strapped nations also would like to see monetary policies at the European Central Bank looser than Germany has been willing to countenance. Mrs. Merkel has signaled no willingness to abandon Germany’s long-standing stance against letting the central bank “monetize” the debt of European nations like the Federal Reserve does with U.S. Treasury debt.
James Goundry, an analyst at IHS Global Insight, said Germany is likely to reject any major departures from the economic austerity agenda it has pushed through the 17-nation eurozone, and it will continue to be cool to proposals to create eurozone-wide debt obligations.
“Germany is extremely reluctant to take any step toward the mutualization of debt in the eurozone,” he said.
Nevertheless, both Mrs. Merkel and Mr. Hollande are “pragmatic” politicians who realize they have to get along and find a solution, so they probably will agree to some minor growth measures, such as boosting the funds available through the European Investment Bank, he said.
While French voters signaled unease with the Germany’s cold-turkey approach to budget cuts and reforms, the Greek elections exhibited an even more radical and potentially destabilizing rejection of the austerity regime and bailout engineered there by the EU and International Monetary Fund to forestall an imminent debt collapse earlier this year.
Leaders of the far-left and far-right parties in Greece that gained power in the election have outright rejected the bailout deal, raising the chance that Greece will withdraw from the eurozone. The prospects for such a major break from the euro in Greece have been troubling global financial markets all week.
While the French election “offers the possibility of a more balanced approach to the European quagmire,” the Greek election “was unambiguously bad news as it raises the likelihood of more instability and potential political chaos,” said Russ Koesterich, an analyst with iShares Global Market Intelligence.
“With this election, voters in Greece lashed out against fiscal austerity,” said Costas Azariadis, an economics professor at Washington University in St. Louis. “Politicians who favored the Northern European model of balanced budgets, labor market reforms and global competitiveness were sent packing. Many voters, especially those working in the public sector, opted to preserve the European welfare state with a strong safety net, good pensions and free medical care.”
Mr. Azariadis thinks that, with extremist parties in charge, the chances that Greece will renege on its obligations under the bailout deal and exit the eurozone have increased significantly. The clock is ticking on a potential catastrophe in Greece, he said, because the country will run out of cash and go into default by the end of June if it does not adhere to the bailout deal.
“The repercussions from an outright default are hard to predict and include some scary scenarios,” he said.
While the U.S. has been vindicated thus far in promoting growth over austerity, analysts say the fast-accumulating debt in the U.S. rivals the proportions of many European countries and quickly could become a ticking time bomb as well.
“It’s critical that the United States address its own economic challenges before the markets force drastic action like the measures under debate in Europe,” said Kristen Silverberg, senior fellow at the German Marshall Fund of the United States. She noted that Greek citizens are facing a 77 percent increase in their value-added tax while in Italy the total tax burden would increase by 45 percent.
“The United States still has the opportunity, by acting quickly, to rein in spending and preserve entitlement programs with more modest measures,” she said. “Deferring action until a crisis develops makes solutions harder mathematically” as well as politically, she said.
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