Europeans Reject Austerity

Europeans reject austerityFrance, Greece and parts of Germany voted on Sunday. Their message was loud and clear: many Europeans are not prepared to go along with threats to their cherished way of life.

Francois Hollande ousted Nicolas Sarkozy, becoming the first Socialist elected president since Francois Mitterand. Mr. Hollande declared after this victory that “Austerity need not be Europe’s fate.” The new president stressed a “growth” agenda instead. The problem is that he equates growth with more government spending. French government already controls 56% of French GDP, the largest percentage in Europe. Mr. Hollande expects to balance his budget on the backs of millionaires whom he proposes should be paying a 75% income tax. Even though the French government hasn’t balanced their budget in 35 years, he is not suggesting fiscal reform; rather he has campaigned on a promise to renegotiate the German-French euro collaboration known as “Merkozy.”

Greek voters sent an even louder message against austerity in elections Sunday. They rejected the country’s two incumbent parties; supporting smaller left-and right-wing parties that campaigned against the austerity program Greece must implement in exchange for continued European financing. Apparently, Greeks want an end to the sacrifices directed by Brussels and Berlin. Now, with seven parties expected to enter Parliament, Greece has a completely fragmented government. The front-runners have until May 9th to form a coalition. Political instability may ultimately challenge the country’s future in the euro zone.

Closer to home for Angela Merkel, her Christian Democrat Union took 31% of the vote in Schleswig-Holstein to place first, but it was its lowest share of the vote since 1950. Ms. Merkel has continued to focus on policies to cut debt. Two weeks ago in Berlin, she put it this way: “You can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.” The elections Sunday show that many Europeans don’t agree.

Mr. Hollande campaigned on modifying the euro zone’s “fiscal compact” so that it not only constrains government deficits and public debt, but also promotes growth. However, according to the Economist on April 28th, his program is not suggesting slower fiscal adjustment to smooth the path of reform; he is proposing not to reform at all. With the Dutch government brought down over deep budget cuts and the election results from Sunday, the “balance” in Europe may be changing. More Europeans are rejecting austerity. If Europe is not collectively willing to pursue painful reforms, can the euro survive?

Greek Rescue Approved- But Europe Not Out of the Woods

Greek rescue

Today Europe finally reached a Greek Deal. Yet, doubt remains over whether Greece will be able to meet the terms of the accord and what the future holds for the euro zone.

The finance ministers agreed to the long-awaited 130 billion euro ($170 billion) deal that would start to reduce Greece’s debt to 120.5% of GDP by 2020. Private sector creditors will take a write-down on their Greek bonds of 53.5%. In return for the new cash, Greece signed up for cuts in pensions, minimum wage, health-care and defense spending, sales of assets and layoffs of public sector employees. However, even with this latest agreement, concern exists that Greece will not be able to meet its future commitments.

The Greek economy shrank by 7% in 2011, 5% of which was in the last quarter. Analysts expect further declines of at least 4% in Greek GDP in 2012 due to the required austerity programs. These structural reform measures, on top of Greece’s already 20% unemployment, will only deepen Greece’s recession. To make matters worse, businesses are not investing in Greece’s future until the euro is secure. Suppliers are not extending Greek firms credit, which is worsening the current liquidity shortage.

Elsewhere in the euro zone there are glimmers of hope. According to the Economist, Ireland has regained competitiveness, Spain’s new government has been able to reform long rigid labor laws, and Italy has passed a pension reform and is soon to propose labor reforms of its own. Yet, austerity in the short-term causes more unemployment and reductions in spending and GDP. Italy, Spain and Portugal are all expected to see a sharp drop in GDP in 2012.

By the end of February, European leaders are expected to agree on a new, higher “firewall” for euro countries that get into financial trouble. A permanent 500 billion euro ($650 billion) fund, the European Stability Mechanism is expected in July. This could bring much-needed momentum to the euro zone.

Yes, Europe has reached a Greek deal. Yet, the road to recovery for the euro zone will still be long and hard.

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