Chancellor's choices: Subsidise rest of the continent or risk collapse of the euro
By Jonathan Eyal, The Straits Times, 8 May 2012
LONDON: It was only by fluke that France and Greece, nations on the opposing edges of the European continent, held their national elections on the same Sunday.
Still, the result of these ballots - President Nicolas Sarkozy's defeat in France and the meltdown of Greece's entire political class - unleashed something more fundamental: a continent-wide revolt against the pain of economic austerity.
To be sure, there are local reasons that led voters to reject Mr Sarkozy and the mainstream Greek parties, but at the heart of it, the real target of the rebellion is Germany, the country which underpins Europe's financial system and its keenest advocate for deficit-cutting.
The victory in France of Mr Francois Hollande, who campaigned against more belt-tightening, shows that 'there is another solution to a policy based solely on austerity in Europe', said Mr Sigmar Gabriel, the head of Germany's main opposition Social Democrats.
The voters' revolt against Germany's preferred model of more austerity also means that its Chancellor, Dr Angela Merkel, is faced with an acute dilemma: She can either decide to subsidise the rest of the continent regardless of the costs, or refuse to do so and risk the collapse of all the European structures put in place since World War II.
Yesterday, the German government insisted the deficit cuts and reforms imposed by the European Union in exchange for bailing out Greece was the 'best path' forward. And Dr Merkel again ruled out reworking the fiscal pact signed in March.
'At its core, the discussion is about not whether we need budget consolidation or growth - it is absolutely clear we need both,' she said.
The German Chancellor has always believed that the root of Europe's economic crisis is excessive government spending, and that the only answer is to repay existing debts in order to regain the confidence of financial markets. Most other European leaders were not persuaded but, since Germany was the only country able to save them from bankruptcy, they had no choice but to go along with Dr Merkel's prescription.
The result of all that budget-cutting was the biggest economic recession in peacetime: a fifth of all Greeks are now out of work, half of all Spaniards aged 25 or under have no job and France's unemployment figures are at their highest in decades.
Seen from this perspective, Mr Sarkozy's electoral defeat was eminently predictable: the hyper-active president who promised the moon but ultimately delivered little has joined 10 other incumbent European leaders rejected by their electorates since the financial crisis started.
Yet there is something more profound about the victory of Mr Hollande, who has almost single-handedly changed the tone of the debate in Europe.
Instead of accepting that the economic recession is due to Europe's failure to live within its means, he has put the blame for the crisis on international financial circles. 'My true adversary in this battle,' he told French voters during the electoral campaign 'has no name, no face, no party... it is the world of finance.'
Mr Hollande's argument was that the only long-term method of reducing government debt is by actually borrowing more, and that the only way of restoring France's prosperity is by using the government to kick-start the economy. The formula proved to be a vote-winner not because it made much sense, but because it allowed Frenchmen to believe that they face no hard choices; it was similar to telling an alcoholic that the cure to his addiction starts with uncorking another bottle.
Certainly Mr Hollande is hardly the only leader to have won power by promising to spend more. But he has successfully persuaded voters of his ability to spend another nation's money. For Mr Hollande cannot get the cash he needs to fund his projects by just raising domestic taxes. Nor can he borrow on international markets at affordable interest rates. As he openly admitted during the electoral campaign, his only realistic hope is to pressure Germany to bankroll his electoral promises.
This places Dr Merkel in a tricky situation. On the one hand, her voters are fed up with financing repeated bailouts of various European nations which never worked as hard as Germany, and failed to manage their budgets responsibly.
But at the same time, the German public believes that everything must be done to prevent the euro from collapsing: they accept Dr Merkel's argument that the alternative to the single currency may be chaos and even a Europe-wide war.
President-elect Hollande assumes that, ultimately, Dr Merkel will be forced to offer more cash in order to maintain European stability; in effect, he is betting that Germany can be blackmailed into saving France.
For the moment, Dr Merkel refuses to be alarmed. She assumes that, once installed in the Elysee presidential palace next week, Mr Hollande can be persuaded to drop most of his electoral promises in exchange for some minor concessions. Behind the scenes, officials in Berlin are working on a scheme which will offer small amounts of cash for French infrastructure programmes, just enough to allow Mr Hollande to claim a triumph, without abandoning current austerity plans.
But there are plenty of less benign scenarios which are just as likely to come to pass. To start with, Mr Hollande cannot abandon his electoral promises at least until the middle of next month, when France holds parliamentary elections: He wants his Socialists to win these elections, so he has to keep up his left-wing rhetoric.
Germany, however, cannot afford to make big concessions, if only because any special treatment given to France will immediately be demanded by other European countries. Why should Ireland, Portugal or Greece suffer the severe pain of recession when France is exempt from it?
And, as yesterday's reaction from the financial markets indicates, the real danger is that France's new course will persuade investors that Europe is no longer serious about cutting its debt, unleashing a panic which forces Spain and Italy into asking for a financial bailout. Saving Spain is just about feasible, but bailing out Italy is beyond anyone's means without tearing up all the existing financial arrangements, and without Germany accepting liability for the continent's entire debts.
Anti-austerity wave sweeps Greece, France
Greece's future in euro doubtful; new French leader to spur growth
Bloomberg, Associated Press, 8 May 2012
ATHENS: Greece's political leaders struggled to find the support needed to form a coalition government after voters flocked to anti-bailout parties, calling into question the country's ability to impose the measures needed to guarantee its future in the euro.
Meanwhile the same anti-austerity wave swept France, as Mr Francois Hollande, who defeated President Nicolas Sarkozy to become the first Socialist leader in 17 years, pledged to push for more growth in the region.
The Greek election came as unemployment reached almost 22 per cent, with almost 51 per cent of those under 24 jobless.
Greece's New Democracy won just 19 per cent of the total vote and 108 seats with more than 99.3 per cent of the ballots counted, according to the Interior Ministry website.
Socialist Pasok, which partnered with New Democracy in securing a second rescue package for the country, trailed in third place with 13 per cent and 41 seats. This leaves both parties two seats short of the 151 seats needed to win a majority.
As voters across Europe punish governments for failing to control a debt crisis triggered by Greece, New Democracy leader Antonis Samaras said he would try to put together a 'national salvation' government that will keep the country in the euro. 'I understand the rage of the people, but our party will not leave Greece ungoverned,' Mr Samaras said in Athens after the vote.
Even if he succeeds in building a coalition, it will be tough for the new government to push ahead with further belt-tightening measures, and the European Union may then stop its bailout financing.
'Europe can live without Greece but I don't think Greece can live without Europe,' said analyst Vangelis Agapitos.
Democratic Left, the only realistic coalition partner, said yesterday it will not join any pro-bailout coalition.
Of Greece's €266 billion (S$432 billion) of debt, about €194 billion - or 73 per cent - is held by the European Central Bank, euro-area governments and the International Monetary Fund.
In 2010, before the first bailout, Greece owed about €310 billion, all to the private sector.
Sunday's big winner was the anti-bailout coalition, Syriza, which has vowed to cancel the bailout terms. It got 17 per cent and has 52 seats as the second-biggest party, boosting its showing from the 2009 election nearly four-fold.
In France, president-elect Francois Hollande told supporters after he won about 52 per cent of the vote: 'Austerity isn't inevitable. My mission now is to give European construction a growth dimension.'
Mr Hollande inherits an economy that is barely growing, with joblessness at its highest in 12 years and a rising debt load.
He wants the European Central Bank to more aggressively spur growth - a measure opposed by Germany. He takes office next week before heading to summits of the Group of Eight and Nato in the US.
Mr Hollande has proposed higher taxes for big companies and cuts for small and medium-sized businesses; a 75 per cent levy on incomes above €1 million a year and special taxes on banks and oil companies. His platform would raise spending by €20 billion over his five-year term.
Tax increases and eliminating loopholes would seek to raise €29 billion.
The budget plan aims to eliminate the deficit in 2017, one year later than under Mr Sarkozy's plan, with a 3 per cent of gross domestic product deficit target for next year.
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