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Leader: The fate of the eurozone lies with François Hollande

The Greek coalition talks have broken apart. The debt-ridden country will head back to the polls on 17 June and the left-wing Syriza coalition is expected to take first place and the 50 bonus seats that come with it. The question then will be whether Syriza, empowered by the electorate to form a government, will attempt to enact its anti-austerity policies and, if it does, what Germany’s reaction will be.

“Grexit” – or Greece’s exit from the eurozone – seems to be fast approaching and its chief victims will be the long-suffering Greek people. Some will argue that they brought it on themselves. In 2004, the Greek government revealed that its predecessors had cheated to join the euro, fudging the national deficit to appear under the 3 per cent threshold for entry. But the actions of the government have been unfairly conflated with those of its citizens; the myth of the “lazy Greek worker” prevails, even though the country’s average working week is two hours longer than that of Germany.

Either Greece accepts the savage spending cuts required to stay in the eurozone or it defaults, devalues its currency and has austerity forced upon it through loss of credit. One or the other may be better in the long term but both will be painful indeed in the immediate future. (Is there a third option? Kitty Ussher, on page 18, suggests that there is.)

Then there is Spain, where youth unemployment stands at 51.1 per cent. Yet Spain had been a paragon of financial responsibility. The last time it ran a pre-crash budget deficit higher than 1 per cent of GDP was in 1999; in the three years leading up to the crash, it ran a surplus. And after the crisis, it responded as so many countries did, by turning to austerity in a frantic attempt to retain its credit rating.

Spain has slashed budgets so far that it can slash no further. Cuts haven’t worked. The country had agreed with the European Union to reduce its 2011 deficit to 6 per cent but the latest figures show that it came in at 8.5 per cent.

Spain’s woes are undoubtedly exacerbated by its membership of the eurozone. Many of the fears voiced about the currency at the time of its creation have proven to be accurate. A monetary union without a corresponding fiscal union has led to large imbalances within the eurozone and no easy way to solve them. Without the euro, Spain could just devalue its currency and do away with many of its present problems. With fiscal union, real redistribution of wealth could occur in the eurozone. Americans, for instance, do not talk of “continuous bailout”. They just call it Mississippi.

However, the design flaws of the single currency aren’t the only driver of Spain’s, or Greece’s, misery. The eurozone as a whole flatlined in the first quarter of 2012, with 0.0 per cent growth both quarter on quarter and year on year – a poor result but better than many expected. And it was also better than the UK, which contracted further last quarter than the eurozone.

For that reason, blaming the UK’s problems on Europe rings hollow. Were it not for an increase in exports to Europe, that contraction would have been larger still. The truth is that Britain is suffering from a double-dip recession that originated in austerity-obsessed Downing Street.

The failed austerity experiment in this country should act as a warning to the Continent’s leaders. The EU ought to abandon its absurd fiscal compact that outlaws Keynesian demand management. In the short term, Germany, in particular, needs to allow for a looser eurozone monetary policy to compensate for the near absence of much-needed expansionary fiscal policy.

But time is short. What could spark such a change of heart? Enter stage left François Hollande, France’s first Socialist pres­ident in 17 years, who has called for growth over austerity. The future of the eurozone could be in his hands.

An inspired reshuffle

It may have been only a “mini” reshuffle but it was an inspired decision by Ed Miliband to give senior positions to the freethinking Jon Cruddas and the admirable Andrew Adonis. The Labour leader looks more confident. But is that the sound of goalposts shifting? His disparagers continue to dismiss his achievements. They have insisted that Labour should enjoy double-digit leads over the Tories in the polls. Check. That the opposition should close the gap on economic competence. Check. That Mr Miliband should be more popular (less unpopular?) than the Prime Minister. Check. What more does he have to do to satisfy them?

This article first appeared in the 21 May 2012 issue of the New Statesman, European crisis