Au revoir, austerity

Europe is reconsidering the fiscal pact. Get set for another round of chaos

Au revoir, austerity

Pascal Le Segretain/Getty Images

Among the casualties of national elections in France and Greece last weekend, Nicolas Sarkozy’s now-finished career is a comparatively insignificant footnote. The outgoing French president suffered a historic defeat, becoming only the second incumbent presidential candidate to lose in half a century when he fell to the Socialists’ François Hollande. But the election wasn’t really about the two men—or at least it wasn’t about Hollande, the bland and modest lifelong politician who possesses little of Sarkozy’s flair and mercurial arrogance.

What is really at stake in France, and across Europe, are competing visions about how the continent might recover from a crushing financial crisis.

In December, 25 of 27 European Union states agreed to a “fiscal compact” to coordinate financial policies and enforce budgetary discipline. But these austerity measures are deeply unpopular in parts of Europe with soaring unemployment and sizzling social unrest. Greece is regularly rattled by strikes and protests. Millions of Spaniards have flooded public squares to protest public spending cuts and record levels of joblessness. In France, where unemployment hovers around 10 per cent, even modest pension reforms provoked massive demonstrations.

But street protests and strikes are imperfect measures of public mood. They draw out the angry and the visible. Elections are something altogether different. And last weekend’s votes were a major test for the austerity strategy in the hearts and minds of European citizens. It failed, raising the worry that Europe is turning its back on fiscal restraint. There are renewed fears Greece may exit the eurozone, consisting of those 17 European Union countries that have adopted the common currency, and that financial disarray in Europe will impact global markets, including Canada.

Sarkozy campaigned in defence of the fiscal pact and austerity—even though the economic reforms he enacted as president were timid and largely unsuccessful. France and Germany form the core of the eurozone. Together with German Chancellor Angela Merkel, Sarkozy drove the fiscal pact’s creation. They were so closely aligned in managing Europe’s debt crisis they earned the joint moniker “Merkozy,” as if they were a Hollywood couple. He even considered inviting her to campaign with him.

François Hollande staked out the opposite side of the battleground. He said his enemy was “the world of finance” and pledged to renegotiate the fiscal pact. When Merkel said this was impossible, that Europe could not function if new governments unraveled agreements made by their predecessors, Hollande retorted: “It is not Germany who will decide for the entirety of Europe.”

In Greek parliamentary elections, the debate followed a similar script, but grew much more heated. On one side were the two traditional mainstream parties, the centre-right New Democracy and the centre-left Pasok. Both supported multi-billion-dollar bailout deals with the European Union and the International Monetary Fund requiring deep spending cuts and higher taxes. Aligned against them were previously marginal parties, including extremists on the left and right, opposed to austerity.

Faced with a choice between continued austerity and groping for a new path out of Europe’s financial muck, voters in France and Greece chose the latter. Hollande won in France. Greek voters routed New Democracy and Pasok. The two parties fell from dominance to approximately 19 and 13 per cent of the vote respectively.

Suddenly, Europe’s united front on austerity looks shaky. The fiscal compact—still not ratified—is on unstable ground. With Sarkozy, Merkel’s partner in relative fiscal restraint, defeated, even the German leader suddenly seems exposed and vulnerable. Other politicians hoping to avoid his fate may decide austerity is not such an attractive campaign slogan.

“There could be quite a switch in general policy in European crisis management,” says Timm Beichelt, a political science professor at European University Viadrina in Frankfurt (Oder). Higher taxes used to be a killer of leftist governments, he says. “But now you have a presidential candidate in France who says that we need higher taxes and he is not punished by the voters.” Beichelt expects other European politicians to follow Hollande’s lead—a sentiment the French president-elect evidently shares.

“I’m only too aware that the rest of Europe is watching us,” he told supporters at a victory rally. “When the results were announced, I’m sure many people across Europe heaved a sigh of relief knowing that austerity is no longer a foregone conclusion.”

Europe adopted a strategy of fiscal restraint because it is facing a genuine economic crisis. But austerity has brought little relief to the average worker who suffers most. Europeans are angry and impatient, and according to some analysts they have a right to be. “It’s not that they haven’t tried. They’ve tried since 2010 with this,” says Waltraud Schelkle, a senior lecturer in political economy at the London School of Economics’ European Institute, speaking of the austerity measures.

The Spanish case, she says, is truly frightening. The Spanish government introduced drastic spending cuts in an effort to reduce debt levels while the unemployment rate hit 24 per cent in March. “A country that has done almost everything right is pushed into such a difficult situation that others might say: ‘Sorry, Merkel, we’ve given your recipe the time it needed to work and show light at the end of the tunnel, and it hasn’t,’ ” says Schelkle.

But austerity’s proponents say it hasn’t been given enough time, and that politicians who reject it are likely more worried about their own political careers than Europe’s financial health. “As an immediate remedy in a crisis, austerity doesn’t work,” says Jan Techau, director of the European centre of the Carnegie Endowment for International Peace. In the short term, austerity measures worsen the crisis, he says. “So it’s very difficult to make the case for austerity and for cuts. The problem is governments across Europe are in a bind. They can’t not have austerity. They must go that way, because all of them are broke—almost all of them are in very difficult shape, budget-wise.” The structural reforms that European governments have avoided making in the past 30 years have to happen or “the continent is not going to survive economically,” Techau adds. “That is the thing that governments really need to do, but everybody feels they can’t do it because it would be political suicide.”

Fortunately, at least for those hoping that Europe will not abandon budgetary restraint, measures that might have been political suicide while campaigning have a way of becoming unavoidable once a politician faces the task of governing. Hollande has promised to renegotiate the fiscal pact, for example. But according to Spyros Economides, a senior lecturer in international relations at the London School of Economics, this is a vague pledge that might be satisfied were Hollande to squeeze a few minor concessions from Germany.

Hollande has challenged “Merkel and German attitudes,” says Economides. “But who’s to say that in a few months’ time they won’t sit down and agree on a plan that allows France to claim leadership over European integration, and allows Germany to be the powerhouse?” That’s the most likely outcome, he says, because if in the end the European Union is at stake, countries like Germany and France will not want to be held responsible for its unravelling.

Merkel has already said she will welcome Hollande to Germany “with open arms.” She can’t afford not to. “Probably there will be a compromise, this kind of typical European political arrangement where at the end of the day you have the feeling that everybody wins,” says Bruno Cautrès, a researcher at l’Institut d’études politiques de Paris (Sciences Po). One possible outcome is the creation of a “growth pact” parallel to the existing fiscal pact, which will be designed to generate employment. This will allow austerity skeptics such as Hollande to claim victory. But, says Iain Begg, a research fellow at the LSE’s European Institute, there’s little he can realistically deliver.

“There isn’t a huge amount of choice in Europe at the moment because of the precarious position of the public finances in so many countries. Politicians can promise all they want. But if they engage in a mad dash for growth based on orthodox Keynesian policies, they’re simply going to run into trouble very soon,” he says.

But even a change of tone from Europe, rather than a radical overhaul of its economic plan, may have far-reaching consequences. European stock markets fell early this week, and the euro also dropped against the U.S. dollar. “The biggest danger I see is the rise of protectionism,” says Tim Smith, a professor of history and public policy at Queen’s University. Hollande has indicated he will focus on trade within Europe rather than across the Atlantic. “This general rise in protectionist sentiment probably does not bode well for any Canadian-European free trade agreement,” says Smith. John Baird, Canada’s minister for foreign affairs, insisted in an interview with the CBC that French election results will not negatively affect negotiations toward a free trade deal: “We’ve had good discussions from across Europe on that. And we hope to enjoy that same discussion with the new government in France.” A sudden turn away from austerity could lead to more economic uncertainty in Europe, and a more sluggish global recovery. Under this scenario, governments would be forced to borrow even more money from financial institutions to cover generous social programs, creating more market instability. A sudden Greek withdrawal from the euro would batter Greece, which would still have to import goods from the rest of Europe with a newly devalued currency. And it would provoke fears elsewhere about which struggling economy would leave the eurozone next.

A popular backlash against austerity has also coincided with a surge in support for far-left and far-right political parties in Greece. At press time, the radical-left coalition Syriza, which became Greece’s second-largest party after Sunday’s election, was trying to form an anti-austerity coalition government after New Democracy, which earned the most votes, failed to do so. The nationalist Golden Dawn party also surged on Sunday’s election, earning almost seven per cent of the vote. It now has 21 seats in the Greek parliament.

“It’s awful. It’s a terrible, terrible blight on Greek politics,” says LSE’s Economides. Golden Dawn, he says, is “a neo-fascistic, neo-Nazi party. It doesn’t offer any kind of coherent platform apart from racism and extreme nationalism. I think it’s simply a sign of the times. Like in other countries in Europe where the far right has grown over the last few years, poverty and austerity, fear of immigrants legal and illegal, have led to a sharp increase in the popularity of this party.”

Some Greeks supporting Golden Dawn appeared to do so out of anger. Andonis Stavrakis, 67, said he had voted for Pasok since 1981 but was now voting for Golden Dawn to “punish” the other parties. Sofia Pandeli, a neighbourhood kiosk owner, also voted for the far-right party. “We Greeks have spoken,” she said, shaking her fist. “Are you listening, Merkel?”

Still, Alexander Privitera, senior fellow at the American Institute for Contemporary German Studies, says Golden Dawn’s success in parliamentary elections doesn’t mean mainstream Greek public opinion is warming to fascism. “We’ve seen protests. We’ve seen frustration. But we haven’t seen any signs of a collapse of the political system in Greece. And this is after four years of severe—not only austerity—but recession,” he says.

Still, Techau of Carnegie Europe believes that as the market forces parties of both the centre-left and centre-right to endorse unpopular austerity measures—as happened in Greece with both Pasok and New Democracy, and as he believes will be the case in France under Hollande—fringe political movements will prosper. “Hollande will have to move to the centre. He can’t give his fairy-tale version of France. He won’t be able to deliver it, because then he’s going to bankrupt France. So he needs to move to the centre, thereby alienating his own left, and at the same time deserving even more wrath from the radical right.” Europe’s way out of this mess isn’t mysterious, only unpalatable, says Techau.

“The entire political strategy of Western European governments since at least the 1970s has been to buy off the voter, to buy social stability in a very difficult continent, a socially unstable continent, by basically pampering people.” This has given two generations of Europeans enviable social welfare programs. “But everybody knew that with demographics and our increasingly encrusted economic systems, they wouldn’t be sustainable,” says Techau.

“And the crisis has now made this so visible. It has thrown all of these things in our face. These non-nimble economic systems will have to get more nimble, or they will go bankrupt. Then we get the real social catastrophe, because then the elderly and the poor, and all the people who are in real need will indeed get nothing, or will get severe cuts. It’s going to require a lot of sacrifice—not only from the people, but from the politicians who will lose their jobs over it.”

But the willingness of Europeans to confront this crisis appears shakier with every proxy election on austerity. “Instead of tackling these underlying structural problems, what we’re doing—or especially what the left and right fringes are doing—is blaming globalization, blaming the other, looking outside beyond the borders to blame somebody for it,” says Techau. “ ‘The Germans are too competitive and Mrs. Merkel doesn’t want to give us the money.’ Or, ‘Eastern European labour is too cheap.’ Whatever. Everybody is to blame but ourselves.”

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