The problem of growth in Europe

SPRING OF DISCONTENT: Europe needs to find a way out of the recession but there is no consensus on how, writes Nicholas Kulish

IN the volatile aftermath of raucous elections, which nearly destroyed the political establishment in Greece and ended 17 years of conservative reign in France, the emphasis across Europe, even in the austerity heartland of Germany, has shifted to the real problem of growth for the stagnant continent.

But there are few ready answers for how to turn around recessionary economies during a major sovereign debt crisis, and it will take weeks of contentious wrangling to determine whether the Germans can be pressed to make more than cosmetic changes to their focus on fiscal discipline for all.

At the ascetic end are modest concessions by Germany to repackage existing initiatives to be more supportive of growth. At the opposite extreme, particularly in countries plagued by soaring unemployment, are calls to unleash the European Central Bank to intervene more aggressively in bond markets and for governments to use the credit of the strongest European countries to support growth in the weaker ones through common "euro bonds".

Francois Hollande, who defeated President Nicolas Sarkozy in Sunday's run-off election in France, has provided a rallying point for those across Europe who support stimulus spending to promote short-term growth as the way out of the crisis.

But he will face a difficult path if he cannot budge Chancellor Angela Merkel of Germany away from her insistence on austerity.

"By himself, Hollande cannot change the world," said Peter Bofinger, a prominent economist on Merkel's independent council of economic experts. "There are laws of economic gravity, and if he alone says, 'I'm willing to accept higher deficits', the risk is high that the markets will force him to give in."

Bofinger said that what was needed was to slow down spending cuts for countries in the midst of recession and "a transfer of fiscal sovereignty to the euro-area level" as a step towards euro bonds. But he said that such an approach was still extremely unpopular in Germany.

Merkel left no doubt about whether she was ready to embrace the most radical measures, strongly rejecting Hollande's suggestion that European leaders reopen a compact on deficit reduction that they adopted in March.

"We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable," Merkel said at a news conference in Berlin. "It has been negotiated and has been signed by 25 countries."

But discontent has soared in Europe, evident in the high number of voters supporting radical parties both in the first round of voting in the French presidential election and in Sunday's vote in Greece, which brought an extreme-right party, the ultra-nationalist Golden Dawn party, into Parliament in Athens for the first time.

In the meantime, the number of prominent politicians demanding new stimulus measures has grown. In Rome, Prime Minister Mario Monti, a technocrat appointed in November as the euro crisis deepened, said the outcome of the French vote was a "call for a reflection on European policies".

"Responsible public finances are a necessary condition, but certainly not sufficient for the key objective: sustainable growth that creates employment and is orientated towards social equality," Monti said.

"For this reason it is fundamentally important that Europe urgently adopts concrete policies for growth."

Merkel's political opponents at home also said a shift was necessary. Sigmar Gabriel, leader of the opposition Social Democrats, said on Monday that the result in France showed that "the politics of Angela Merkel and Nicolas Sarkozy led Europe deeper into crisis".

The victory for Hollande will "not only change France, but finally help Europe to go in another direction", Gabriel said. Yet the consensus for lower budget deficits and public debts is entrenched in Germany and reaches across party lines. Gabriel was careful to add that "no one wants to do away with the fiscal pact" but merely add measures promoting growth and jobs to it.

Klaus-Peter Flosbach, a member of the finance committee in Parliament and a spokesman on finance matters for Merkel's Christian Democratic delegation, said: "The fiscal pact is the basis for further cooperation. In the parliamentary groups of the coalition there is absolutely no support for introducing euro bonds."

The hard line embraced by Merkel and her party has been popular with German voters, and as the country's most populous state, North Rhine-Westphalia, prepares to vote in a new state Parliament next week, it is little wonder that Merkel refuses to bend. Nor can Hollande afford to tone down his message with the French parliamentary elections coming up.

"I don't see coordinated fiscal stimulus happening," said Mark Hallerberg, director of the Fiscal Governance Centre at the Hertie School of Governance in Berlin.

Action by the European Central Bank, however, seems more likely.

"Euro bonds are a red line; quantitative easing much less so," Hallerberg said. "It's fashionable for the Bundesbank to always complain, but it's only one vote. Merkel can blame the bank. The Germans may be sending mixed signals."

The adjustment will be slow and incremental rather than quick and decisive. "There will be a bit of inflation, and there will be some pay increases," Hallerberg said. "Higher wages make Germans wealthier. It's hard to hate."

In an interview in the German newsweekly Focus, Finance Minister Wolfgang Schaeuble said it was appropriate for wages to rise more quickly in Germany than in other EU countries.

"These wage increases also have the effect of reducing the imbalances within Europe," Schaeuble said. NYT

Pedestrians passing a souvenir shop displaying a magazine with president-elect Francois Hollande on its cover on Champs Elysees boulevard in Paris. Monday May 7, 2012. France handed the presidency Sunday to leftist Francois Hollande is championing of government stimulus programmes who says the state should protect the downtrodden, a victory that could deal a death blow in response to Europe’s recession. AP pic

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