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Spain and the UK are in recession, and Europe is once more in peril. This time, the problem's political.
LONDON, UK — Like a bad movie franchise that refuses to die, Europe’s debt crisis lumbered back into view this week, rehashing weary plot lines of debt and recession while introducing a few new characters fresh for the kill.
At the end of the last installment, it looked like the debt-stricken euro zone was over the worst of it. The European Central Bank had come galloping to the rescue with a massive injection of cash into the banking system. And a disorderly Greek default had been averted.
But the latest sequel finds Europe once more in peril.
This time, the crisis has evolved into a political mess.
On Monday, markets dropped in response to political uncertainty in France and the Netherlands. Elsewhere, new data showed Spain slumping back into recession, piling on the downward pressure.
Shares rallied again by midweek. But by then, an urgent new debate had broken out. Were Germany’s austerity measures really preferable to growth-boosting policies?
Read more: Two (bad) test-cases for austerity
That argument could swing upcoming votes not only in France, but also Greece and the Netherlands. It could also determine the future of weaker economies such as Portugal, Spain and Italy — all teetering on the brink of bailouts.
A surge in right-wing votes on Sunday left France’s first-round presidential election wide open, raising the prospect of victory for Socialist candidate Francois Hollande over incumbent Nicolas Sarkozy.
Defeat for Sarkozy would mean an end to the already endangered “Merkozy” — the French president’s (now-ailing) partnership with German Chancellor Angela Merkel, which has imposed tough austerity on countries requesting bailouts from the EU and the International Monetary Fund.
If he wins, Hollande has promised an economic U-turn, introducing growth-oriented policies and a redraft of last year’s so-called fiscal compact forging greater European political and economic integration.
The Netherlands is also rife with political uncertainty, following the collapse of the government after austerity talks failed. Caretaker Prime Minister Mark Rutte has appealed for help to make deep budget cuts, but there are fears the country will remain in limbo for months.
Read more: Election-year euro bashing in France
The upheaval came as international ratings agency Fitch, which has previously threatened to downgrade the Netherlands’ triple-A credit score unless it reined in its finances, predicted that the country would miss next week’s EU deadline of cutting its budget deficit to 3 percent of GDP.
Such turmoil in what was once considered a euro zone safe haven isn’t provoking too much alarm, said Investec analyst Elisabeth Afseth, but she said it does raise further questions about the integrity of the euro zone and the wider austerity policy.
“If one of the core countries is in breach of that fiscal compact before it comes into force, then there’s very little credibility about it,” she told GlobalPost.
“Perhaps it’s not the right solution to begin with. If it’s not even adhered to by the strong countries, there’s little chance that anyone else will stick with it.”
There was more gloomy news from the fringes of Europe, when the UK unexpectedly announced a return to recession — its first “double dip” since the 1970s — but this was largely eclipsed by even worse economic data from Spain.
With a recession yanking the rug out from under Spain’s efforts to cut its deficit, the International Monetary Fund warned that the government may have to bail out its vulnerable banking sector to the tune of billions of dollars as bad loans climbed to the highest levels in 20 years.
Read more: Why can't the EU generate growth?
Spain’s woes are likely to reverberate around the continent in a constrained echo of the crisis that began three years ago in Greece, another country where severe and deeply unpopular austerity measures are yet to yield positive results.
It was therefore little surprise that economic sentiment in the euro area dropped sharply in April. This, said SocGen chief UK economist Brian Hilliard, was a “strong message” that a recovery in spending was still a distant prospect and a deepening recession was on its way.
“Signs of bottoming out observed between December and March are over, as is the hope that spending would recover once sovereign tensions ease,” he said.
As resistance to austerity gathers pace, Germany’s Merkel appears to be increasingly isolated. She tacitly acknowledged this by launching a defense of her policy in Berlin this week. “We’re not saying that saving solves all problems,” she said. “[But] you can’t spend more than you take in.”
But with Merkozy likely to be torn asunder, Afseth said there was a possibility the alliance could be replaced by a new “growth compact,” involving the likes of Hollande. This, she said, could break the uncertainty of current policies.
Read more: It's over for Merkozy
“I’m not entirely sure this is such a bad thing as austerity on its own is not working,” she said.
However, she acknowledged that even this may not offer the long-term solutions many would hope for, meaning that further bailouts could be down the line.
So, stand by for another sequel.