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Europe on edge

Published:Monday | May 14, 2012 | 12:00 AM

By John Rapley

Last week, the French and Greek governments became the latest to take the hit for their mishandling of the economic crisis. When he was elected president of France in 2007, Nicolas Sarkozy made no secret of his fondness for billionaires. That cosiness came back to haunt him at a time when billionaires, largely seen to have caused the 2008 financial crisis yet to have paid no price for it, enjoy a poor press.

Mr Sarkozy had thrown his lot in with German Chancellor Angela Merkel, forging the accord to use austerity as a means to restore growth to Europe. French voters said no. They elected the socialist candidate, Francois Hollande, who calls for a growth path that prioritises short-term stimulus, and retrenchment only after prosperity has returned.

The election results in Greece similarly turfed out a government, but without the relative optimism that accompanied the French result. If Mr Hollande articulates a strategy that many economists find sensible, the Greek one expressed a disturbing amount of anger. Like in France, extremist parties did well. Yet, given the dire state of Greece, the parties are so far out on the spectrum, their commitment to democracy is suspect.

The neo-Nazi Golden Dawn party, in particular, will gain a presence in Parliament to complement its racist street gangs. After expelling journalists who refused to stand for him at a press conference, the leader of Golden Dawn proudly announced that the time for fear - anyone who opposes him should feel afraid - had come.

Obsessed with austerity

Back in Berlin, Ms Merkel is holding firm. She is saying a deal is a deal, and everyone must continue cutting their budgets. Germany's obsession with austerity has deep roots. The country fears inflation, which can result from badly executed stimulus programmes, like other countries fear unemployment or hunger. This is because Germans remember the 1920s, when high inflation destroyed the country, thereby enabling the rise of Hitler.

But Germany also points to its own recent success with austerity. Earlier this century, the government engaged in painful reforms, but the result was to usher in the healthy growth we now see. But as many economists point out, Germany cut its spending when other economies were growing. It needs to now cut some slack to its partners, boosting its own growth while they do their own cutting.

The message may be getting through. Despite her firm public stance, Ms Merkel has also said she will welcome Mr Hollande with open arms when he visits Berlin this week, the day after his inauguration. Yet if Ms Merkel needs to budge, so, almost certainly, will Mr Hollande. France's new president comes to power on a wave of expectation among his supporters that he will restore the social model of old.

Unsustainable model

But on current growth projections, this model is simply not sustainable. Sooner or later, France will collapse under the weight of its financial obligations, as Greece is now doing. Mr Hollande will have to disappoint his followers, possibly badly, obtaining a bit of stimulus now in return for cuts later.

Greece is in a worse way. Germany's finance minister hinted last week that Europe was prepared to see Greece go. The concern of Europe's leaders has always been not with Greece itself, but with the precedent a Greek exit from the euro might set for larger countries, like Spain. But over the last couple of years, they have quietly been putting in bailout measures that they believe will make it possible to stem the contagion of a Greek exit.

Greece's leaders, therefore, enjoy little bargaining power, and even less sympathy, in Europe's other capitals. A small country which has lived well beyond its years for decades is one that is easily cut off by its bigger partners, no matter how much more enlightened those partners become.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.