Bill Emmott - International Author & Adviser


The new route of Europe comes from protest votes
La Stampa - May 6th 2012

Democracy is, at its most basic, a mechanism of control, of accountability. So elections are times for registering anger, for protesting, for punishing those who have been in government during bad times. Today’s elections, in France, in Greece, in Italy and in Spain, like the local elections on May 3rd in Britain, will primarily be moments of protest. But they could also form a turning point.

            Protest is not at all surprising when much of Western Europe is back in its second recession in five years, when unemployment is at least one-tenth of the workforce, and when youth unemployment is at 30% in Italy and 50% in Spain and Greece.

            It is especially not surprising when there is so little to be optimistic or hopeful about. Government policy in the eurozone is dominated by fiscal austerity, cutting budget deficits by raising taxes and reducing public spending. For those countries, like Italy, with public debts so large that lenders are no longer willing to finance them unless they are trimmed, such austerity is unavoidable. But it guarantees recession and unemployment and lack of hope—at least when it is the only policy, and is presented as the only available direction.

            That dominance of public policy by austerity, that mantra that fiscal discipline is the only possible direction, is what makes today’s elections, particularly those in Greece and France, a potential turning point. The difficulty in making forecasts of what these elections might bring, however, arises from the fact that Greece and France could, potentially, turn Europe in different ways.

            The Greek parliamentary elections matter because in the 17-country body that is the euro, Greece represents the sickest, most gangrenous limb. Its economy is now contracting for the fourth year in a row. Despite several massive financial rescues, and big discounts on its public debt from private creditors, Greece plainly still cannot afford to bear its current level of debt. Some further solution is going to have to be found.

            As in all the European elections, extremist and protest parties look likely to do well in Greece today. But whereas a large vote for Beppe Grillo’s Five Star Movement will not transform Italian politics or change the policies of President Monti, large votes for Greek extremists, including most notoriously the ultra-rightist Golden Dawn party, could transform Greek politics and policy if they mean that the two big mainstream parties, New Democracy and the socialist Pasok, are unable to command a majority in a coalition.

            The most important way in which such parties could transform Greek politics is by turning the balance in Parliament against continued austerity and reform, which almost certainly means against continued membership of the euro.

            Most private economists have long thought that a full Greek debt default is more or less inevitable, but have forecast that the moment for default would not happen until 2013, by when fiscal austerity might have gone sufficiently far that the country could then survive without new foreign borrowing. But a big vote for extremist parties today could bring that date of default closer.

            A Greek exit from the euro would, in the view of this British economic commentator at least, be healthy for the euro, just as it can be good for a human body if a gangrenous limb is amputated. But as in such a surgical operation there would be dangers, especially of panics in the bond markets and perhaps of new collapses among European banks. It would be a very dangerous moment.

            Is that also true of France, if that country today elects as its president Francois Hollande, the Socialist? Not in the same way, no. Unlike President Nicolas Sarkozy, Mr Hollande is a typical member of the French elite, educated at one of its “grandes ecoles”. He is not going to be a dangerous radical. But his election may well alter the whole European debate about economic growth.

            There will, admittedly, be some short-term danger from a Hollande victory. This danger arises because in June France is also due to hold parliamentary general elections, and so Mr Hollande cannot know how strong his government will be until after that June vote. He will, in effect, still have to be campaigning for a further month, in the hope of influencing those polls. This will add to the uncertainty surrounding Europe.

            Mainly, however, a Hollande election will be important because it promises to refresh, or perhaps destabilize is a better word, the central inter-governmental relationships in Europe, which are those between Germany and France, first of all, and then between those two and the other big countries, which means Italy, Spain, the Netherlands and, in its more detached way, Britain.

            Francois Hollande has said he wants a new focus on growth and will renegotiate the December fiscal treaty in order to achieve it. The question that remains to be answered is what this can and will mean. It will not mean a change to the rules governing budget deficits and debt: Germany will not accept such a change, and France would not dare to demand it. But it could mean two other things.

            A “compact for growth”, as President Mario Draghi of the European Central Bank has called for, can only mean a combination of market liberalization and greater public investment in infrastructure. Market liberalization, in the form of an extended and deepened European single market, is what Mario Monti called for in the letter to other European governments in February, signed also by Britain’s David Cameron and nine others. So far, France has opposed this, and Mr Hollande has campaigned against liberalization.

            The other part, public investment, is possible only if countries with good credit ratings and low borrowing costs agree to finance it. This would have to be done through a big expansion of the European Investment Bank, with capital coming chiefly from Germany and other creditors.

            Why should Germany agree? The first answer is that Germans, like everyone else, realize that continued recession is dangerous, politically. The longer it goes on, the more that extremist parties will benefit. The second answer is that if France were to make a pact with Italy and others and at last support market liberalization, there would be a chance of a trade-off: more public investment in return for more structural reform, which Germans should approve of. It would be hard, in such circumstances, for Germany to block a direction fully supported by Mario Monti.

            And the third answer is that Germany, too, will soon have elections, in the autumn of 2013. If, by then, the European economic situation has only got worse, then Chancellor Angela Merkel, too, will face protests. Her coalition partner, the Free Democrats, is virtually dead as a political party.

            Her choice in 2013 for a new coalition partner will be the Green Party or a grand coalition with the Social Democratic Party, her main opposition. She will be in a stronger position by then if she can be seen as genuinely having saved the euro and with it the European economy. Today’s elections in Greece could be dangerous for that hope; the election in France will challenge it, but at least with France a deal could be done.


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