“Time for the traditional European summer of crisis,” says Buttonwood on Economist.com. Markets shuddered this week as they were confronted with “a complete lack of clarity about the direction of future policy” in Europe following the elections in France and Greece. It doesn’t help that all this political uncertainty comes on top of a worsening eurozone downturn.
Is Europe changing policy?
“Finally austerity is no longer destiny,” said François Hollande last weekend after becoming France’s first Socialist president in 17 years. Hollande has suggested that the German-inspired fiscal pact, which requires governments to balance their budgets, could be watered down or renegotiated. He wants Europe to “reorient” its policy towards growth. It’s a popular message, given austerity is worsening the downturn and making countries’ debt piles even bigger as a proportion of their GDP.
For its part, Germany has already made clear that diluting the fiscal treaty is not an option. But it does seem willing to establish a ‘growth pact’ to complement it. As Quentin Peel in the FT notes, two ideas floated by the European Commission recently – an increase in the capital available for the European Investment Bank and the issuing of jointly guaranteed European ‘project bonds’ to finance infrastructure projects – “are getting a fair wind in Berlin”.
However, while such measures are “worthy, they are not of the scale needed” to give the continent’s growth a significant kick, says Hugo Dixon on Breakingviews. The trouble is, a major stimulus would have to involve borrowing more. But “where is the money to come from for fiscal expansionism”? wonders Jeremy Warner on Telegraph.co.uk. “The markets are still as reluctant to lend as ever.”
Germany will be loath to fork out more for bail-outs, which would jeopardise its top credit rating, says Wirtschaftswoche. Joint euro bonds (as opposed to more specific ‘project bonds’) are also taboo. Hollande will have to “come to terms with the fact that Germany remains the eurozone’s political and economic hegemon”, says Eurasia Group.
Domestic politics in both France and Germany may also complicate matters in the short term. Hollande’s Socialist party is still campaigning for parliamentary elections in early June, which it is expected to win. Meanwhile, German chancellor Angela Merkel’s influence in the upper house has dwindled further after her party lost power in a state election on Sunday. That may make her more likely to accede to opposition calls for more measures to boost growth in the longer run, says Commerzbank’s Eckart Tuchtfeld.
Still, Eurasia Group’s conclusion looks sound: we are likely to see “a flurry of announcements and initiatives, none of which will make a serious impact on short or medium-term growth prospects”.
France: the next debt domino?
Hollande’s election has also fuelled fears that “a sluggish and unreformed France”, whose debt pile has already reached 90% of GDP, could be “at the centre of the next euro crisis”, says The Economist.
Hollande has promised to balance the budget by 2017, with the emphasis on raising revenue. He has proposed higher taxes for big companies, a 75% levy on annual incomes over e1m and special taxes on banks and oil companies. He also plans to water down one of his predecessor’s few reforms: a rise in the retirement age from 60 to 62.
Measures to boost France’s productivity and competitiveness through structural reforms, such as loosening the inflexible labour market, are absent from Hollande’s programme. He is also pencilling in unrealistically high annual growth rates of more than 2% to help him balance the budget. Given all this, bond investors may soon run out of patience, says Sam Fleming in The Times, “pushing the euro even closer to the edge of the abyss”.