Europe's New Look Economic Austerity

By: Andrew_McKillop

WRONG WAY BET
Defended on French TV channel BFM in an evening marathon looking at Francois Hollande's first year of power, April 29, by his Economy minister and other "party heavyweights" with a lackluster crop of one-liners, viewers saw recent opinion polls asking if French voters would vote again for Hollande, if an election was held today.

Roughly 19% said they would, and 64% said they would vote for Sarkozy if he stood again. Street interviews with average persons, one after another, said they voted the wrong way in 2012.

Hollande has been forced to claiming he is a leader in at least one thing - persuading European Union governments to start relaxing their austerity-first approach to economic policy. Better late than never, some might say, but in the current European political scene this can mean invective. Several leading members of Hollande's Parti Socialiste, April 27, produced a sharply-worded personal attack on Angela Merkel, followed by a rambling attack on supposed "German austerity policies".

Among other things, Merkel was called an "egoist". German-speaking prime minister Jean-Marc Ayrault was quick to Twitter that he disavowed the attack, was a Germanophile, and relies on Franco-German understanding and friendship in the task of building a unified Europe. The old refrain, but this hides a change in Eurozone thinking, including German thinking.

Europe's political economy, today, has plenty of politics but little in the way of economics. The rambling attack on German stances by Hollande's left wing, called a "facts-based criticism of policy", was prompted by Europe’s economy continuing to deteriorate - with no solutions on the table. Business and consumer confidence in April plunged by a predictably "unexpected" amount, in Germany as elsewhere. Unemployment rose again, to over 12% average in the EU27 according to Eurostat. The debts of the euro area’s most beleaguered economies, and the so-called "core economies", are mostly still rising, some of them rapidly, despite all the belt-tightening. Called "austerity" but light years away from what "austerity" meant in Europe's past, or means in the economic text books, the debt-deficit-recession trajectory has only one final landing area: economic ruin.

GIVE US TIME - AND MONEY
Last week, Spain’s government said it needed two extra years to bring its budget deficit below the EU target of 3 percent of GDP. This is a new European economic tradition - announcing "extra time needs", often pushed out to 2017 or even 2020, which makes Spain's two year stretch modest. The alternative would have been another round of tax increases and spending cuts, despite the record unemployment rate of 27 percent (55 percent for young persons), showing no signs of a pause, as in France, where 12 months of Hollande came with 12 straight months of rising unemployment.

Spain's 2-year stretch was followed by Italy's all-new government coalition doing the same thing, delaying a 6-billion-euro tax hike, but in neither case did this bring a sharp rebuke from Brussels or Berlin. For Hollande, this was a personal triumph. On the same day, German Finance minister Schaeuble, the country’s leading austerity exponent, and Spanish Prime Minister Rajoy announced plans for joint investments in Spanish companies. Not called a distressed assets purchase program, but close to it, European countries now have to run these programs, bringing new meanings and a new look to Europe's "diluted austerity" which enables Hollande to say that France's near-5-percent of GDP budget deficit for 2013 is "economic growth oriented". Minister Schaeuble said that Germany is open to permitting this "French austerity", showing Franco-German friendship rules, and Hollande's Parti Socialiste hotheads have been ignored.

But Schaeuble did not stop himself saying "France’s labor costs are too high". Change however can't happen overnight and Schaueble also said that France's program for cutting labor costs "Must be done step by step". To be sure, his Economics minstry has all the publications which show exactly what has happened in Europe. The vicious circle of recession and increasing debt, followed by fiscal tightening and further recession, topped by an overvalued euro. 

Schaeuble himself calls this "reinforcing the downturn", and has talked about the need for a Europe-wide coordinated fiscal relaxation, led by Germany, of course, with the other stronger economies in the Eurozone. When this happens is set by only a few things.

BOND MARKET BOGEYMAN
The political posturing and occasional spats in fact only have one real background driver. The fear of bond markets. Too much fiscal easing in debt-stressed countries such as Spain and Italy, Ireland, Portugal, France or Belgium could generate more 2012-style market turmoil. At present,  Italy’s government can for example sell long-term bonds at a yield of just under 4 percent, the lowest since Europe’s debt crisis escalated in 2010. Mutualising the debt, using German borrowing power to borrow, to invest in Spain's ruined economy is the present example, is the real strategy - stealthwise of course.

The ECB’s mantra that it is neither going to let the euro fall, or let interest rates rise has an undertow of fiscal "burden-sharing", cheap monetary stimulus and Europe-wide action to get labour moving and employed. The ECB can cut rates when it wants, and may do it. How much the euro slips against the dollar is the subject which is always avoided, but $1.18 is the fetish rate, shown in dozens of ECB publications on its Internet sites.

Monetary policy, however, can only do so much at this time, after so much self-inflicted damage has happened. This is known, but not exactly made the meat of speeches by Germany's economic and monetary deciders. Other more-public themes are put in the window, especially the now intensifying Europe-wide fight against tax havens and moneylaundering. Until the German elections later this year, the needed banking union reforms will also be shuffled out of the limelight, allowing Europe what it needs --  a lot of rethinking to do.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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