Euro Talks Tense Up Over Austerity Pact

With the election of Francois Hollande to the French presidency, French-German tensions over European Union economic policy are escalating.

In the course of his campaign, Hollande repeatedly promised to mitigate the austerity programs championed by outgoing president Nicholas Sarkozy and his partner, German Chancellor Angela Merkel, over the last two years. But Merkel insists that “Europe’s fiscal discipline pact is not up for negotiation.” What was enacted in the “Merkozy” era must stand, she says: “It is a basic approach in Europe that we do not change everything we’ve decided upon already after elections.”

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Regardless of the line that Merkel has drawn in the sand, Francois Hollande’s victory is bound to reopen debate. Fiscal austerity is being challenged across Europe by demands for investment to grow the region’s economy, even if growth programs must be paid for with borrowed money. The era of using spending cuts to cure Europe’s ills may be ending. As commentator Paul Krugman says, “There seems to be little if any gain for the pain.”

Events in Greece add to the uncertainty. The splintering of party support in recent elections is widely interpreted as a clear rejection of the bailout agreement for Greece that was dictated by the Merkozy alliance. The dominant Greek political parties scramble to form a coalition, while a completely fragmented Parliament remains suspended. Whatever the outcome, support for the bailout will take a major hit.

The French and Greek elections are thus seen as a rebuke of European leadership for its failed austerity programs. Merkel’s tough prescription for the recovery of the floundering southern EU countries must yield. Even in Germany, support for conservative fiscal policy seems to waiver on the eve of state regional elections. However, the exact direction that EU negotiations will take remains to be seen.

If Francois Hollande’s growth-oriented initiatives are to take hold, they must be accompanied by increased revenue flow to countries that borrow money to fund such initiatives. If those countries were to experience a significant trade surplus vis-à-vis Germany, for example, the strain of new borrowing could be eased. But it’s unlikely that will happen as long as the Central European Bank is exclusively focused on belt-tightening. Expansionary policies would need to see a new dawn.

And there is evidence, say EU conservatives, that the problems didn’t begin with austerity but with unrestrained spending. It’s an argument they’re not likely to relinquish, and one that’s hard to refute. To it, they’ll add that austerity is working in Ireland and just needs more time on the continent.

Some insist that the way to ease up on austerity is for Spain and Greece to leave the European Union altogether, though that would mean default, along with its dire consequences for the region and perhaps the world.

In the end, neither Merkel nor Hollande are likely to seriously threaten their leadership alliance. Most likely, the tense French-German debate will result in the implementation of modest growth programs that will somehow live side-by-side with the current fiscal discipline pact.

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