The Coming Eurozone Austerity Battle - Council on Foreign Relations
Recent elections in France and Greece pose significant challenges to the strict economic austerity policies Germany has called for in response to the eurozone sovereign debt crisis. Still, Germany has resolutely rebuffed any efforts to alter the European fiscal compact agreed to late last year, explains CFRâs Sebastian Mallaby. âThereâs a battle coming up between Hollande and his European partners as to quite what a growth agenda might mean,â he says. At the same time, the political situation in Greece is âmore potentially cataclysmic in its consequences,â Mallaby argues, because it could not only signal a Greek exit from the eurozone, but also undermine European financial institutions and facilitate further sovereign debt contagion.
Voters in Greece rejected the countryâs mainstream political parties, and, by extension, the latest EU-IMF bailout. In France, voters elected FranÃ§ois Hollande to implement pro-growth policies in a worsening economic climate. What are the implications of these recent elections on EU efforts to resolve the eurozone debt crisis?
In the case of France, what FranÃ§ois Hollande has done by defeating [current President Nicolas] Sarkozy is basically to put on the agenda a âgrowth pact.â The question is how to define that rebalancing of European policies away from the austerity formula that has driven it so far. The problem is that there are three competing definitions of what Hollandeâs growth agenda might mean for Europe. Thereâs a kind of [ECB President] Mario Draghi version of this, which is that the growth pact should involve the kinds of structural reforms for the labor market and so forth that have already been put in place in Italy and Spain. The problem with that is that although it drives better growth in the longer term, in the short term, labor market reform means firms can fire people more easily, and those structural reforms actually will drive a reduction in employment and demand in the short term and make recession worse. There is a different version of what a growth pact might mean and one that FranÃ§ois Hollande is more keen on, and that is ideally to relax the austerity pactâthe fiscal responsibility pact, as [German] Chancellor [Angela] Merkel called it. But Germany has rejected that option. So thereâs a battle coming up between Hollande and his European partners as to quite what a growth agenda might mean.