The new President has claimed a renegotiation of the Fiscal Compact to mitigate its deflationary impact and to include measures aimed at growth. The reaction of Angela Merkel has been a prompt and peremptory rejection.
The victory of François Hollande was not only a great event in the history of French politics, but it has also opened a new phase in European crisis. Yet, on how the new phase will develop there are no certainties. The current disastrous trend of European policy will not change course easily. The expectations of the second socialist President of the V Republic, dominated in over half a century by rightwing presidents, are so high as to risk being too ambitious. But one thing is certain: the European policy debate enters a new phase, and many masks are bound to fall.
The austerity policy has failed. The cure is killing the patient. Greece has buried the parties which had espoused the austerity line, but the European leadership continues to deny any reasonable way out. As we write, no agreement has been possible toward the formation of a government based on the old dominant parties that had accepted Brussels’ diktats, and the likely upcoming elections announced for June probably will mark the victory of the radical left coalition, led by the young Alexis Tsipras. His agenda is clear in the commitment to keep the euro, but renegotiating the conditions imposed by the Troika (European Commission, ECB, and IMF).
That will be the moment of truth. If Europe is back on his feet, taking away the noose of Greece, the deviation from the austerity policy will be reflected on the other diseased eurozone countries - first of all, Portugal but also Spain and Italy. If European leaders will maintain a line of intransigence and deny the aid to Greece, agreed with the second rescue bailout, the new Greek government will face a tough alternative: either repay maturing debt and interests, or pay salaries and pensions, declaring default on debt.
Markets would definitively know that the eurozone is set on a slippery road. And without a radical change of European policy, Spain could become a time bomb. The Spanish banking system has accumulated 180 billion of insolvent loans and, while the government has requested support for the banking system, Brussels has imposed deficit reduction from the current six percent to three percent in 2013. In U.S. terms it is like calling for a deficit reduction of about 500 billion dollars for two years in the midst of recession.
If this sequence of events is not unblocked, Italy with a sovereign debt much higher than that of Spain and a interest payments hovering five per cent of GDP, amounting to around 80 billion euro, would find itself on the front line of assault by markets.
Hollande is aware that France could hardly save itself in a framework of progressive collapse of the eurozone. Its economy is stuck and unemployment has exceeded 10 percent. The spreads over German rates are still relatively low, hovering around 150 basis points, but Italy also was on this level in the spring of last year. And now ten year yields are hovering around 6 per cent. Is this a pessimistic scenario? Two years ago no one would have guessed the eurozone would be locked In a new recession and challenged by popular insurrection in a growing number of countries.
Hollande has not announced a Keynesian policy of deficit spending. He confirmed the commitment to balance the budget by 2016. But he has claimed a renegotiation of the Fiscal Compact to mitigate its deflationary impact and to include measures aimed at growth. The reaction of Angela Merkel, not particularly concerned by the ominous defeats suffered in the regional elections given the large consensus at national level on her European policy of fiscal rigor, has been a prompt and peremptory rejection. She is opposed to intervention by the ECB in the purchase of sovereign debt in the primary market, as well as to the issue of eurobonds collectively guaranteed by Eurozone countries. Hollande’s first response was calm and determined. “On this question – he said - we will have discussions with our partners and in particular with our German friends, but they cannot put into place two deadlocks at once: one on the Eurobonds and the other on the direct financing of debt by the ECB”.(Slate.fr, May 7).
The Berlin-Frankfourt-Bruxelles axis is elaborating a proposal based on a growth pact sidelining the fiscal pact. Actually, a fake scheme aimed, on one hand, to facilitate the use of structural funds by claiming a lower financial contribution from states that receive them. On the other, increasing the capital base of the European Investment Bank to finance public and private investments particularly in the energy and large band networks. Solutions more symbolic than effective in coping with the scale of the sovereign debt crisis, magnified by unbearable interest rates, which only the ECB intervention or the issue of eurobonds with lower interest rates could deal with..
The fact remains that even the EU authorities do not believe that austerity alone can produce the needed growth. Not surprisingly, the austerity strategy is invariably coupled with the other face of the coin, the structural reforms. Indeed, austerity is the framework that should push the latter. Central to the structural reform strategy is the reform of the labor market. It has been implemented in Greece and Portugal and is at the heart of the Italian debate. A more organic model has been implemented by the Spanish prime minister Mariano Rajoy. And this is the kind of labor reform that the EU Commission and the ECB consider a model to be generalized. There are two key points. The first is making individual dismissals easier; the second is enabling companies to reduce wages negotiated in the enterprise’s contracts, which replace the national bargaining.
Neoliberal reforms of welfare state and labor market are the true long-term goal. It is not a case that the structural reforms, once implemented, will reverse the crisis or recover growth. The sacrificial victim is the European social model, its safeguards and workers’ rights, condemned to disappear as an unbearable legacy of the last century.
The outcome of the challenge that faces Hollande, who the French people promoted to the Elisée as the heir of François Mitterand, father of the euro together with Kohl, is essential in determining the fate of the European Union. The new socialist French President is undoubtedly confronted with a hard mission. We must hope that the masochistic fundamentalism of the current EU leadership does not transform it in a "mission impossible", paving the way for a gradual disintegration of the European Union