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European austerity fatigue spreads

European austerity fatigue spreads

Wave of opposition will weaken German influence

by David Marsh

Mon 30 Apr 2012

Austerity is never pleasant. It is less pleasant if imposed from the outside. And it is certainly not pleasant if it is perceived to be misguided.

There are several powerful indications that austerity fatigue is spreading in economic and monetary union (EMU). We saw on Friday the news that nearly one in four people in Spain is unemployed, together with yet another statement (this time from the Spanish foreign minister) comparing the European Union with the doomed vessel Titanic.

Additionally, Mario Monti, the Italian prime minister, last week warned that the austerity drive risks shrinking the euro area economy and leading to a double-dip recession. Although Angela Merkel is the driving force behind the austerity push, Monti was careful to steer away from direct criticism of the German chancellor. That was probably wise. Italy may well find itself in need of an EMU – for which read German – bail-out if the country’s bond yields continue to rise and the economy continues to contract.

No such constraints stopped François Hollande, the probable next president of France, from directly criticising Germany, which he said cannot make decisions on behalf of the entire region. (An intriguing historical note: the fundamental objective behind EMU, from the French viewpoint, was to stop Germany, in the shape of the Bundesbank, from making decisions that affected the whole of Europe. We really are back to the position of 20 years ago.)

Given that Hollande is a leading proponent of a ‘growth compact’ to supplement the recently agreed ‘fiscal compact’ and wants to change the European Central Bank’s goals to include a growth component, it is not difficult to see his statement, too, as a sign of austerity fatigue.

A ‘growth compact’ is probably misguided. Partly because the ‘fiscal compacts’ by any name – Maastricht criteria, Stability and Growth Pact, etc. – have proven meaningless, but more importantly, because governments cannot wave a magic wand and produce growth. If they could, they would have done this. They can produce an environment conducive to growth – but it must be said that most EMU governments seem to have done the opposite.

However, there are two important points. First, austerity fatigue is spreading. The longer austerity is maintained and increased without any seeming benefit in terms of growth, the wider the opposition. Second, with Germany closely identified with the austerity policy, austerity fatigue will erode German influence over the euro area. This is even more likely as German politicians refuse to do the one thing that could justify and alleviate the impact of austerity on others, namely stimulate Germany’s own economy and, crucially, re-orientate it towards greater domestic demand.

At the moment, Germany is getting the worst of two worlds. It is imposing austerity on other countries, which among other things stops them from buying German goods. And it is making these countries adversaries, by seemingly enforcing a ‘pain but no gain’ policy. Neither can be a good idea for Germany.

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