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Austerity with a human face?

With markets calm, European leaders are starting to challenge Merkelomics.

Greece protest 05 01 2013Enlarge
Police seen through a burned EU flag in Athens on Wednesday. More politicians are now voicing popular anti-austerity slogans. (Louisa Gouliamaki/AFP/Getty Images)

BRUSSELS, Belgium — "With nothing but austerity, Italy will die."

Europe "is being battered by the selfish intransigence of Chancellor Merkel."

It's time to fight unemployment caused by a "society that seeks selfish profit outside the bounds of social justice."

Europe has become used to such slogans in countless street demonstrations against the German-inspired austerity policies that many now blame for the ongoing recession gripping much of the continent.

In the past few days however, that disquiet has spread. The quotes above weren’t bellowed by firebrand street fighters, but come respectively from: Italy's new prime minister, France's ruling party and Pope Francis.

After four years of belt-tightening and little sign of recovery, calls for Europe to change track are going mainstream.

"We are reaching the limits of the current policies," acknowledged Jose Manuel Barroso, president of the European Commission at a think-tank conference last week.

Barroso's aides at the EU's executive body were quick to clarify that his words do not represent a U-turn. Four years into the euro zone crisis, however, the lack of results is casting more and more doubt on the drastic tax-hike-and-spending-cut policies that have been promoted by the commission and Angela Merkel's administration in Berlin.

Austerity's intellectual base has also been shaken. A study last month revealed errors in a landmark 2010 study by Harvard economists Carmen Reinhart and Ken Rogoff on the negative impact of debt on growth that has been much-cited by belt-tightening politicians.

The recession and record unemployment that have accompanied penny-pinching policies across southern Europe were supposed to be a short-term price to pay for sound public finances that were to lay a foundation for a lasting recovery.

Instead, debts have continued to rise. Greece's have expanded from 129 percent of economic output in 2009 to 156 percent last year; Portugal's from 83 percent to 123 percent; and Spain's from 58 percent to 84 percent.

Target dates for any economic rebound have been constantly pushed back. Spain became the latest to delay its forecast for clambering out of recession on Friday, announcing this year's contraction would be three times higher than expected, with no sign of even modest growth before 2014.

With the economic gloom threatening political stability, politicians are groping for alternatives.

“Europe can’t be only about austerity ... Europe must pursue policies for growth," Italian Prime Minister Enrico Letta said Tuesday in Berlin. "The message that has arrived from the Italian electorate should not be underestimated."

Letta flew to meet Merkel two days after he was sworn in as head of a broad coalition of left, right and centrist parties. His appointment came two months after elections that swung to the radical Five Star Movement that wants to ditch austerity altogether and pull out of the euro.

Setting out his government agenda on Monday, Letta pledged to meet Italy's promises to control government spending and bring down its the $2.63 trillion debt.

In a concession to the anti-austerity camp, however, he announced a rollback on an unpopular property tax and other deficit-cutting measures introduced by his predecessor Mario Monti.

Letta also hinted he'd be following recent moves by Spain and Portugal to persuade European Union authorities to extend agreed deadlines for bringing down the deficit.

Germany's reaction to all that is key.

There are many in the country who view any backtracking on fiscal rigor as a sign fickle southerners want to return to their spendthrift ways in the hope Germany taxpayers will pick up the tab. Even worse, some fear, their euro zone partners are bent on irresponsible spending that will trigger 1920s-style hyperinflation.

Facing national elections in September, Merkel's cabinet heavyweights were quick to respond to Barroso's suggestion that Europe was reaching the limit of austerity.

"You can't buy growth with debt," Foreign Minister Guido Westerwelle warned. "Some in Europe want to return to the path of more spending, more debt, but that would just mean years of unemployment and undermine the stability of the euro."

Germany's tough line is provoking increasing anger in France — placing strains on the relationship at the heart of European unity.

An internal document from President Francois Hollande's Socialist Party blasted Merkel's economic policies, saying the German chancellor "thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future.”

Hollande's government was quick to distance itself from the comments, but they illustrate the deep differences between Berlin and Paris on the way ahead for Europe.

German officials, for their part, are concerned Hollande isn’t doing what's needed to reform the French economy, with potentially dangerous implications for the euro zone.

France was described as "Europe's biggest problem child" in a memo prepared for Germany's Economics Minister Philipp Rosler that appeared to have been handed to the business daily Handelsblatt last week in retaliation for the French leak.

“French industry is increasingly losing its competitiveness. Businesses continue to move overseas, and the profitability of businesses is low,” said the note, which also complained of France's high taxes, over-regulated labor market and too-generous social welfare system.

Despite such sniping, EU officials say there’s no clear split between north and south. They insist the debate is about striking the right balance between fiscal consolidation and stimulating growth, not abandoning one or the other. Leaders such as Letta, Hollande and Spanish Prime Minister Mariano Rajoy repeatedly stress their commitment to sound finances, they say.

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Merkel, on the other hand, has taken a more understanding approach to countries struggling to control spending in the midst of the recession. Last week, she joined other EU leaders in giving Spain another two years to meet EU deficit targets.

"For us in Germany, budgetary consolidation and growth are not contradictory," Merkel told Letta on Tuesday. "Fiscal policy is not everything, of course. We do politics for people and people want jobs."

Perhaps even more significant than the leeway from Merkel, the markets too seem to be giving euro zone countries more space. Letta was able to go back on Monti's tax pledges and Rajoy to delay spending cuts without the sort of market panic such moves might have triggered a year ago. 

http://www.globalpost.com/dispatch/news/regions/europe/130501/euro-zone-austerity-debate