There have been many flaws in Europe’s strategy to resolve its ongoing debt crisis: The unreasonable obsession with austerity. The persistent reluctance to commit sufficient financial resources. The stubborn rejection of important tools like eurobonds. But perhaps the most misguided notion of all was the apparent assumption among European leaders that voters would meekly accept that strategy, despite the economic suffering and social upheaval it has been creating.
That delusion was shattered on Sunday. In France, Socialist candidate François Hollande beat out Nicolas Sarkozy, one of the key architects of the euro zone’s economic policies, to become the country’s new President. Even more telling, in Greece, the two main political parties, which have supported the biting austerity program mandated by the euro zone in return for two massive bailouts, got trounced. About 60% of the vote went to smaller parties, most of which campaigned against the pledges of austerity and reform made by Athens. Most notably, support for one such party, the Coalition of the Radical Left, known as Syriza, more than tripled from the last election, making it the second largest party in parliament with one-sixth of the 300 seats.
These electoral results spell trouble. Europe is entering a phase of political uncertainty that will almost definitely upend the current, German-backed strategy for tackling the debt crisis. In my opinion, that will cause the crisis to intensify, at least in the short term, but possibly longer, if a consensus on a new direction in the euro zone isn’t reached quickly.
Let’s take on the fallout one election at a time. First, France. Hollande’s victory will almost certainly alter the direction of economic policy in the euro zone away from the strategy imposed by Germany. Hollande is definitely not anti-euro, but he has spoken out repeatedly against the current policies used to quell the debt crisis – most importantly, the overcooked focus on austerity. Hollande made that clear even as the votes were coming in, stating that his victory brings hope that “austerity does not have to be inevitable.” His stand will have two main consequences. First, it becomes almost impossible, in my opinion, for the current austerity-only approach to the crisis to continue. Hollande has vowed to reject an agreement reached earlier this year to impose even stiffer rules and sanctions on debt and deficits in the euro zone, a cornerstone of Berlin’s anti-crisis agenda, unless a “growth pact” is also introduced. Without Hollande’s support, it is highly unlikely that Berlin can continue to ignore the bubbling uprising against austerity.
That takes us to the second consequence. Hollande’s views likely put him on a collision course with German Chancellor Angela Merkel. She has been unwilling to budge on her insistence on austerity, so Hollande’s stance could open a rift between the euro zone’s two most important members. That could alter the entire political dynamic in the euro zone. The close relationship between Merkel and Sarkozy has been the foundation of euro-zone politics, the base on which the entire crisis-busting strategy has been built. If relations between Berlin and Paris sour, or even strain, getting consensus on policy could be more difficult. Germany, too, could find itself increasingly isolated in its approach to the crisis. Hollande’s views coincide with those of the prime ministers of Italy and Spain, who have also called for renewed support for economic growth in Europe. The combined weight of three of the four largest euro zone economies is likely too great for even Merkel to ignore.
Now, to Greece, where the fallout is potentially more destabilizing. When Greece got its second, $170 billion bailout earlier this year, the main concern of policymakers and investors was that the Greek government would never be able to hold up its side of the bargain – a crushing austerity program that was tanking the Greek economy. Now, after the election results, it appears highly likely those fears will be realized. It had already proven difficult for Greece’s political establishment to press ahead with its austerity program when the parties supporting it had firm control of parliament. Now with the legislature fragmented, and with so many new members opposed to austerity, I can’t see how the current bailout package will go ahead as planned. The two biggest parties immediately called for changes to the bailout. Antonis Samaras, chief of the New Democracy party, which got the largest number of votes, said that a new government in Athens should have two aims: “For Greece to remain in the euro and to amend the terms of the loan agreements so that there is economic growth and relief for Greek society.” Meanwhile, the even more strident Syriza head Alexis Tsipras demanded the bailout agreement be tossed out altogether.
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This political turmoil in Athens could well reignite the Greek debt crisis. If Athens refuses to abide by the existing agreements, it could restart a lengthy negotiation process with the rest of the euro zone, and heighten the risk that the bailout won’t go forward. That would again raise the specter of a full-on Greek default and exit from the euro zone.
There are also some bigger questions raised by this weekend’s election results. First of all, there appears to be a disconnect between public support for the euro in Europe and public support for the measures to save it. Most people in Europe seem to think the euro is a grand idea, but when it comes to the reforms necessary to shore up the monetary union, suddenly that support seems to drift away. It’s a form of “not-in-my-back-yard” syndrome. Making sacrifices for the euro is just fine as long as someone else is doing the sacrificing. No one wants to endure the budget cuts, wage decreases and bailout burdens of those sacrifices. Yet if the union is to continue, there is no avoiding those sacrifices. Like it or not, austerity will have to be a part of any policy agenda; so will structural reforms, like boosting labor market flexibility, that are equally unpopular. Solving the debt crisis may also entail greater financial backing by the richer countries of the zone (for a larger firewall, for instance), something they have been dodging to appease their own voters, who have been reluctant to pay up to keep the euro going. So the question is: Will voters ever support the measures necessary to fix the monetary union, and with it, Europe’s struggling economies? And if not, how can we ever escape the debt crisis? And how can the euro survive?
An even broader problem exposed by Europe’s elections is the glaring contradiction between electoral success and fiscal reform. Voters tend not to like the idea of big budget deficits and rising debt, but when it comes to curtailing the spending or paying the taxes necessary to put their governments on a sounder financial footing, they reject the politicians implementing the reforms. This is a potentially impossible paradox that signals a long period of both political and economic instability in most of the world’s most advanced economies. Perhaps voters will be willing to endure higher taxes and reduced government services if they see the benefits (better economic performance) of if they believe the process is fair and equitable. But right now the democracies of the West have not discovered a way to achieve much-needed reform.
There is a silver lining here, though. The bottom line is that Europe’s incumbent politicians are being punished because the policies they have adopted to tackle the debt crisis simply are not working. The strategy has been inflicting intense economic pain on a large swath of the euro zone (Spain, Greece, Portugal, Italy) while showing few, if any, positive results. Borrowing costs remain high, economic prospects bleak. Merkel and the rest of the euro zone’s powerful have generally ignored criticism of their course, and the mounting evidence of its failure. Perhaps this democratic revolt will force positive change – the creation of a more sensible, balanced, and viable strategy that actually quells the debt crisis. If that proves true, the voters in France and Greece may have just done the global economy a big favor.