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Hollande election: future of austerity in europe in doubt by wwy yrj
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Hollande election: future of austerity in europe in doubt by WWY YRJ
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| Article Posted: 10/10/2012 |
| Article Views: 69 |
| Articles Written: 1412 - MORE ARTICLES FROM THIS AUTHOR |
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Hollande election: future of austerity in europe in doubt |
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What replaces it, though, was anything but clear. The newly powerful in France and Greece want to roll back the spending cuts and tax increases that havedefined Europe's response to its 3-year-old debt crisis. Butcampaign rhetoric is likely to prove more extreme than anyreal-world reversal of the budget tightening. RECOMMENDED: Germany frets, markets falter over French and Greekelection results World financial markets took Europe's latest round of politicalupheaval in stride, convulsing early and then recovering.
Thecontinent's uncertain future including the possibility of Greeceleaving the euro was causing anxiety but not panic about thethreat to the global economy. But there is hardly unity in Europe. Sunday night, Socialist president-elect Hollande celebrated hisvictory over Nicolas Sarkozy by vowing, "Austerity can no longer be inevitable!" On Monday, German Chancellor Angela Merkel gently pushed back. She rejected Hollande's call to renegotiate a treaty signed lastmonth on tougher action to control government deficits. "We inGermany, and I personally," she said, "believe the fiscalpact is not up for negotiation." Still, she stressed the importance of French-German cooperation and her willingness to meet soon with Hollande.
Economists said that while the anti-austerity winds are bound tostir up short-term political instability, especially in Greece,they could eventually bring some financial calm. "This is going to force some rethinking" all acrossEurope about how to manage the debt crisis, said Laura Gonzalez, afinance professor at Fordham University in New York . "That is good for everybody." Greece remains the focus of Europe's financial and politicalunease. Political parties that made gains by rejectingbelt-tightening still have to assemble a majority coalition inParliament before they can begin governing. The conservatives gotthe first try Monday but failed leaving a new left-wing, partyto take its turn.
If no party can assemble a coalition, the countrywill need to hold new elections, probably in June. The main stock index in Greece plunged almost 7 percent. France'sCAC-40 ended 1.7 percent higher. The Dow Jones industrial average in the United States fell as much as 68 points early Monday but recouped its losses andended the day down 30 at 13,008. The biggest fear was that Greece's new leadership would renege oncommitments made to secure the country's massive rescue loans oreven leave the euro.
Merkel pressed Greek leaders on Monday to staythe course. "Of course, the most important thing is that theprograms we agreed with Greece are continued," she said. Greece wasn't the only problem. The 17 countries that use the euro and nine other European countries agreed in March to thefiscal compact that seeks to make countries balance their budgets.But bailout fears have intensified in recent months as Spain , Italy and other governments face rising borrowing costs on bond markets,a sign that investors are nervous about the size of their debtsrelative to their economic output. Austerity was intended toaddress these jitters by reducing their government's borrowingneeds, but there has been a negative side effect: As economicoutput shrinks, the debt burden actually looks worse.
As Europe's economy got weaker, the public and politicians grewweary of the budget-cutting required to make the fiscal compactwork. Across Europe, austerity meant layoffs and pay cuts for stateworkers, scaled-back expenditures on welfare and social programs,and higher taxes and fees to boost government revenue. Hollande says he intends to renegotiate the fiscal treaty so thatit places an emphasis on growth and not just deficit reduction. Hesays governments should actually increase spending now, whileeconomies are so weak.
Merkel and the European Central Bank have instead stressed deeper, long term fixes such as reducing redtape for small businesses, making it easier for workers to findjobs across the eurozone and breaking down barriers that countries have created to protecttheir own industries. Those changes involve challenging unions andother powerful constituencies and they can take years to have aneffect. The anti-austerity sentiment appears to be picking up strength. In Italy on Monday, several candidates in local elections whooppose the deficit-cutting promoted by Premier Mario Monti had a strong showing. And the head of the International Monetary Fund one of the institutions that designed the Greek bailout and theausterity measures that go with it warned that Europe has to becareful about pushing austerity too far.
Christine Lagarde said European countries should reduce their budget deficitsgradually to avoid further damage to their economies. Eight of the 17 eurozone nations are already in recession andunemployment across the bloc rose to 10.9 percent in March itshighest ever. The European commission called upon Greece to make "full andtimely" implementation of its budget cuts. Those include 11.5 billion in new cutbacks that must be found in June to makesure Greece keeps getting money under the terms of its second, 130 billion bailout. Economist Christoph Weil at Commerzbank said that if aid is cut off, Greece would be unable to pay itsdebts by autumn, leading to a second default following a writedownof 107 billion in March.
"There is certainly room for negotiations that could save facefor both sides," Weil said. But "patience is wearingthin" with Greece and "I would not count on thishappening." The U.S. and European financial systems are so intertwined that aloss of confidence in Europe could cloud the U.S. economy. But there were few expectations that the votes in France and Greecewould have much immediate effect in the U.S.
Still, they make it more likely that Greece will have to abandonthe euro, roiling world markets, said Jacob Kirkegaard, researchfellow at the Peterson Institute for International Economics. Sarkozy and Merkel were the architects of the European austerityplan so close they were known as "Merkozy." The bigquestion now is if there will be a "Merkollande" inEurope's future. Hollande's plans to jump-start the French economy by investing ininfrastructure and buoying small businesses will determine howbumpy the road ahead is. He has promised to keep the deficit in check by raising taxes onthe wealthy and closing some corporate loopholes but someinvestors say that will kill the very growth he hopes to foster.
If he does start wildly increasing spending, France will no doubtsee its borrowing costs rise which could make his policiesuntenable and prompt a shift back to austerity. It was those risingborrowing costs that eventually forced fellow eurozone nationsGreece, Ireland and Portugal to seek bailouts. Some are hoping that Hollande will turn out to be more pragmatic. "Adieu, election campaign. Bonjour, reality," read aneditorial in Germany's daily Sueddeutsche Zeitung.
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