Supporters of the newly-elected French President Francois Hollande celebrate during a victory rally at Place de la Bastille in Paris early May 7, 2012. Reuters/Pascal Rossignol
Socialist François Hollande’s victory in the French presidential elections and an impressive showing by the leftist Syriza (Coalition of the Radical Left) in the Greek polls on the same day may prove to be a watershed moment in Europe’s battle for survival against global bond markets. Or it may not. For while the backlash against austerity has now reached the European core, the eurozone is still trapped by its own monetary union and lacks the tools to implement an alternative to the depression economics of a crumbling Berlin consensus.
Hollande sent shudders through the European orthodoxy and was branded “a rather dangerous man” by The Economist when he pledged to renegotiate the fiscal compact pushed through by German Chancellor Angela Merkel and the defeated Nicolas Sarkozy in March in an attempt to lock permanent austerity into the European Constitution. “Austerity should no longer be Europe’s fate,” Hollande said in his victory speech in Paris, echoing a perception gaining ground even in Brussels that an obsession with deficits is driving the region into a double-dip recession and an ever deeper debt trap. “‘Merkozy’ is gone. We’re now going to have an open debate in Europe on austerity—not just lip service to growth but real measures, starting with the renegotiation of the fiscal compact,” said Pervenche Berès, the French Socialist Member of the European Parliament (MEP) who heads the committee on employment and social affairs, speaking the week before the elections after a conference in Rome with the slogan “Beyond Austerity.”
Even as the mainstream media warned that Hollande’s populism would be punished by the bond markets, the IMF’s chief economist, Frenchman Olivier Blanchard—who is closer to Hollande’s heterodoxy than might be expected—confessed that “schizophrenic” investors are now as scared by the impact of austerity on growth as they are of fiscal largesse. Even in Germany the austerity paradigm may be under review. Merkel’s office ruled out any renegotiation of the fiscal compact, but Berlin does not oppose adding new commitments to growth. “Hollande will demand that the fiscal pact be supplemented by a robust growth initiative, and the SPD [Social Democratic Party] in Germany will support him,” said Alfred Gusenbauer, former Austrian chancellor, at the Rome conference. This will force Merkel, weakened after local election setbacks, to introduce some pro-growth measures, he predicted.
French Socialist MEPs said their new growth plan will include doubling the European Investment Bank’s capital base to 60 billion euros, which allows it to provide more cheap loans to credit-starved businesses, and issuing bonds for infrastructure development; fast-tracking structural cohesion funds to finance development projects in poorer regions; and adopting a financial transactions tax to curb speculation in the markets. The revamping of the EIB—which unlike the European Central Bank (ECB) can issue debt for investment—now has the support of EU commissioner Olli Rehn, and Berlin seems likely to follow. “We need far more loans disbursed to small business to compensate private credit contraction and fiscal adjustment, and we have seen how effective public development banks can be, from Brazil to China and even in Germany,” said Britain-based development economist Stephany Griffith-Jones, one of the organizers of the Rome conference. She calculates that the EIB could provide more than 30 billion euros’ worth of investment loans a year, a welcome (though barely sufficient) resource for Europe’s credit-starved southern rim, where a spate of suicides of Italian small businessmen in recent months has highlighted the drama of this crisis.