Monday, May 14, 2012

NEWS,14.05.2012.


How Will the French and Greek Elections Change the Direction of Europe?

 

 

As French and Greek voters make their feeling about spending cuts loud and clear, we ask ourselves: why has there been such a strong swing to anti-austerity/pro-growth, how does this threaten the survival of the euro and is a Greek default still possible? The deepening slump has dampened deficit reduction, the fiscal treaty hangs in the balance and patience is wearing thin. Crucially, according to voters and investors, time is running out.Growth vs. Austerity: Deepening Slump Dampening Deficit ReductionFrancois Hollande's victory in the French elections marks a significant change of focus in European politics. In contrast to the rhetoric delivered up to this point, Hollande wants emphasis of policy to be on growth instead of austerity. Why does he want this? Because the situation is deteriorating. Unless a country grows, their debt burden, as a percentage of a decreasing national output, grows and is therefore harder to manage. As iterated by French Socialist lawmaker Arnaud Montebourg, in an interview with BFMTV, "Austerity is everywhere and it's a complete shipwreck".Portugal and Spain are prime examples. While the Portuguese economy is expected to contract by 3.3% this year, the deepening slump is dampening deficit reduction. In fact, the deficit almost tripled in the first couple of months of this year alone. Spain, similarly, is struggling with a deteriorating debt situation. As almost 1 in 4 are without jobs, unemployment is boosting defaults. Bad loan ratios have reached a 17-year high. Survival of the Euro Threatened However, such a drastic change of attitude could damage the Franco-German Alliance, political progress and the very survival of the euro. This is because for Hollande to promote growth, he is threatening the fiscal treaty, perceived as crucial for keeping the euro together in its current form. The Treaty would create closer consolidation within the European union. Handing over authority for National Budgets to a Supra-National entity could ensure the various moving parts of the region interact better as a whole. However, Hollande disagrees with the primary focus on debt and deficit limits, without any pro-growth measures. Whilst the German Finance Minister Wolfgang Schaeuble is ready to discuss initiatives to boost economic growth, Merkel has said she will not renegotiate the pact. As her spokesperson asserted, it "has already been signed by 25 out of 27 EU countries." Instead the likelihood may be a growth pact attached to the fiscal pact. Nevertheless, the problems don't end there. Firstly, Hollande will have his work cut out for him in an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load that keeps France vulnerable. Secondly, can both sides agree what they mean by growth?Growth by any other name... France and Germany disagree strongly on how to achieve growth. Merkel maintains it is through structural reforms -- making it easier to fire workers, which would encourage employers to hire, certainly a key aim for the Italian government. However, Hollande is hesitant and instead wants growth via infrastructure spending. But Germany won't agree to spending funded by borrowing -- exactly opposite to their deficit reduction targets. Therefore, again although rhetoric can be applauded, practical plans remain elusive. A Greece Default Still PossibleUncertainty continues to be a key challenge for Greece as voters in a similar move to the French, overwhelmingly rejected mainstream candidates supporting spending cuts. Crucially, these cuts were aimed at securing bailouts and avoiding a default. Instead, 70% of voterssupported parties that promised to tear up the bailout and attempts may be made to negotiate a gradual ''disengagement'' from the harshest austerity measures of Greece's €130 billion ($168 billion) bailout. This keeps the possibility of a Greek default firmly in the picture and until a coalition is formed, a new election next month is possible.Is time running out?Will there be enough time for political leaders to regain credibility and encourage Eurozone growth? As confidence wanes, borrowing costs rise and debt burdens risk becoming unsustainable. Worryingly, therefore, patience is running thin. Echoing Margaret Thatcher's thoughts on a unified Europe as "the vanity of intellectuals, an inevitable failure: only the scale of final damage is in doubt," the German paper Die Welt wrote after the French and Greek elections: "In the end the results are proof that Europe doesn't work."

No comments:

Post a Comment