|Germany versus Europe|
|Tuesday, 08 May 2012 00:08|
France/Germany vote against austerity, what now?
Given the austerity pact German chancellor Angela Merkel was pushing down Europe’s throat, with able support from French President Nicolas Sarkozy, was only making things worse—with no revival in private investments, lower government spending was lowering GDP growth and raising debt-GDP levels—it comes as no surprise that voters in both France and Greece have voted against this. Apart from the immediate consequences—higher taxes for the rich and larger government, including 60,000 new teachers in France, and nixing austerity pacts signed with EU-IMF in Greece—for both countries, the results throw up a huge challenge for Europe which, if the way the euro has fallen is any indication, requires very deft handling.
From a purely fiscal point of view, the results are nothing short of a disaster. France hasn’t balanced its budget for over 35 years now and while President-elect François Hollande has said he won’t hurt the deficit, his plans involve very dicey tax-and-spend policies including a 75% tax on anyone with an annual income of over ¤1 million and a reversal of the pensionable-age limit back to 60—Sarkozy had raised this to 62, meaning a saving of 4 years for the pension system as contributors made payments for 2 years more and withdrew for 2 years less from it. In the case of Greece, it remains to be seen what happens of EU-IMF loans if austerity is given the go by—while an exit from the euro can’t be ruled out, no one really knows how this will work since, when Greece exits the euro, everyone holding euro-deposits in Greek banks will rush to get them out … apart from holdings in Greek banks by other European banks, there could be an impact on other PIIGS banks as well.
On the other hand, as this paper has pointed out earlier, the Merkozy ‘fiscal compact’ was essentially the old Stability and Growth Pact in a new form and had no real chance of working till Europe designed a mechanism to transfer funds from surplus nations to deficit ones. Commentators like Martin Wolf have argued the problem was never one of excessive spending (http://goo.gl/JiX2V) since till the 2008 crisis, every country except Greece had a deficit below 3%; nor would a debt criterion pick up the crisis countries. The only metric that does, he argues, is the current account deficit since the 2008 crisis resulted in external funding drying up—if external adjustment is the issue, fiscal correction will only worsen things. To that extent, the election results are a godsend since they will force Merkel to relook the entire austerity pact. Europe’s future now depends on whether Germany reads the right lessons.