Since the economic crisis began, the response from European nations has been defined by austerity, often with disastrous results. Growth has collapsed and unemployment has soared as countries have locked themselves into a spiral of spending cuts, low growth and higher borrowing. The lesson of the 1930s – that you can’t cut your way out of a recession – has been forgotten.
Now, after two years in which European Union leaders have missed innumerable opportunities to resolve the crisis, the voters have delivered their verdict. In Greece, now in its fifth year of recession, the bailout parties have been rejected, pushing the country ever closer to the euro exit door. In Germany, the governing Christian Democrats have lost power in the first of the country’s state elections. In France, voters have abandoned Nicolas Sarkozy in favour of François Hollande, the country’s first Socialist president in 17 years. The only discernible pattern is one of anti-incumbency; Mr Sarkozy was the eighth eurozone leader to be toppled in little over a year. European voters, who accepted austerity in theory, have rejected it in practice.
It was to them that Mr Hollande addressed his victory speech, in which he declared that “austerity need not be Europe’s fate”. Such bold rhetoric disguises his essentially moderate stance. Mr Hollande has pledged to eliminate France’s budget deficit by 2017, just a year later than Mr Sarkozy did. Mindful of the fate of France’s last Socialist president, François Mitterrand, who spent freely and was forced to U-turn by the bond markets, he will limit, rather than abandon, fiscal restraint. In the EU, however, where deficit reduction has crowded out all other economic imperatives, Mr Hollande’s approach could prove transformative.
Throughout his campaign, he vowed to renegotiate the German-scripted “fiscal compact”, which precludes the Keynesian expansionism needed to prevent a prolonged recession. By requiring member states to curb structural deficits at 0.5 per cent and by introducing tougher sanctions for those that breach the deficit limit of 3 per cent, the agreement would pile austerity on austerity. Mr Hollande’s proposal is to add a section on growth to the treaty. Yet, faced with this demand, Angela Merkel, the high priestess of austerity, has replied “nein”. She has insisted that the document is “not up for debate”. Even as her own country drifts towards recession, the German chancellor refuses to contemplate any alternative to ever greater cuts.
Austerity may appear individually wise, but it is collectively foolish. The decision by EU countries to cut spending simultaneously means that there is no one to act as a buyer. Mrs Merkel’s government has since suggested that it is willing to supplement the fiscal compact with a separate “growth pact” but it remains to be seen whether this will have comparable legal authority.
The break-up of the euro, once the stuff of Hayekian fantasy, is no longer unthinkable. A Greek exit is likely to have a domino effect on Spain, Portugal and Italy. If the euro is to endure, fiscal stimulus alone will not be enough. As the historian Richard Evans argued in the New Statesman last year, Germany must abandon its narrow fixation on price stability and allow the European Central Bank to engage in quantitative easing as the Bank of England and the US Federal Reserve have been able to do successfully.
Should Mrs Merkel ignore Mr Hollande’s call for a more balanced approach, the danger remains that European voters will look to demagogues and extremists for solutions, as they have done in Greece. If Europe is to avoid economic and social collapse, there is no alternative to growth.