Europe’s peril is Merkel’s challenge
The following editorial appeared in the Chicago Tribune on Tuesday, May 8:
Sunday’s elections in France and Greece provided a jolting confirmation of some old verities. Such as: When times are bad, incumbents get blamed. Voters hate being deprived of goodies they have long taken for granted. Economic turmoil fosters political upheaval.
The campaign outcomes may not be a surprise, but they make it plain how difficult it will be to achieve the changes many countries in the eurozone badly need. Fiscal austerity isn’t popular when economies are booming, and it’s even harder to swallow when they are struggling.
Both the French and Greek economies are doing just that lately. In France, output growth is barely moving, and unemployment is at 10 percent. But the Greeks would happily trade places: Their GDP is in free fall, and the jobless rate is above 20 percent.
No wonder voters were willing to evict French President Nicolas Sarkozy as well as the two main parties that have long dominated in Greece. In situations like this, the public rarely says, “More of the same, please.”
It’s tempting to demand that things go back as they were when times were good. But that’s not an option. Both France and Greece have been living far beyond their means, and they have run up hard against the inevitable limits of that approach.
The government of Greece had to accept stringent austerity measures to secure a bailout it needed to avoid a disastrous default. France had its bonds downgraded, raising its borrowing costs, largely because its debt was out of control.
The leaders who were defeated were trying to reform policies that their countries can’t afford. Now the burden will fall on leaders who resist such changes without offering realistic alternatives.
The incoming French president, Socialist Francois Hollande, has vowed to curb deficits, which would be more credible if he hadn’t also promised to expand welfare benefits, reduce the retirement age and hire lots of new teachers. He wants changes in the eurozone’s fiscal treaty that are anathema to German Chancellor Angela Merkel.
Greece’s future is even less certain after the electorate turned to various small out-of-power parties that oppose the austerity program — including a neo-Nazi faction. Forming a government will be hard, and finding broadly acceptable policies that will allow Greece to remain in the eurozone will be even harder.
The immediate question is whether France and Greece will really refuse to make the changes needed to restore fiscal balance. The deeper question is whether Europe’s monetary union can survive. Writes Matthew Yglesias in Slate, writes: “European voters simply lack the sense of common identity and solidarity that are necessary for such a large and diverse place to share a single system of economic management.”
Germany, historically allergic to inflation, is not willing to accept the sort of monetary easing that the Federal Reserve has employed in an effort to revive the U.S. economy. But that approach would provide a tonic to the economies of Greece and France, making the fiscal challenge less formidable. Easing would make more sense there than it does in the U.S., given the more dire economic situation in France and Greece.
Beyond that, it’s going to fall on Merkel to keep the leaders and people of France and Greece focused on the necessity of curbing fiscal excess and governmental indulgence. Her party had a rough time at the polls, too, on Sunday. But Germany has been more disciplined than its neighbors ... and has the strongest economy in Europe. Merkel’s task is to remind everyone of the facts of economic life.