Why Europe needed a Hollande victoryMay 8th, 2012
This article first appeared in The Times
The warning lights are flashing red again in Europe. It’s little wonder; successive rescue plans have failed to address the problem of the economic imbalances affecting the future of the eurozone. However, the political imbalances within the zone, and within the European Union more generally, are at least as important. In some cases these prevent economic problems are being addressed; in others they exacerbate them. The French election offered a chance to achieve a new start — and only because of victory by the new Socialist President-elect, François Hollande.
The most important political imbalance is in the Franco-German axis. In the first half of the Sarkozy presidency, this was largely a matter of style. Mr Sarkozy’s hyperactivity (and short attention span) did not sit easily with the more cautious approach of Chancellor Merkel. The problem now is different. Since the famous “walk on the beach” at Deauville in October 2010, when Mr Sarkozy signed up to austerity economics, Mrs Merkel has had no trouble handling her French counterpart. But the price for this has been declining or negative growth across Europe — and a rising cost for eventual resolution.
The second imbalance is between Right and Left in Europe. Of the 27 governments, 23 come from the Centre Right. Mrs Merkel dominates the Centre Right European People’s Party. The EPP runs the European Council. It chose Herman Van Rompuy as the President of the Council to ensure a smooth ride for Mrs Merkel and Mr Sarkozy. For good measure, the President of the European Commission, José Manuel Barroso, also comes from the EPP. The result has been groupthink.
The third imbalance, a consequence of the first two, is institutional. The intergovernmental and supranational elements of the EU have got out of kilter. It comes to something when David Cameron, leading a Brussels-bashing Tory party, calls for the Commission to assert itself in protecting the interests of all 27 European Union members.
There is also a fourth imbalance: Britain’s retreat in the EU. It is not central to the Euro-story, but it is important in relation to wider questions, because large sections of the European political and economic class want us to play a bigger role, because they know that Europe loses its balance when Britain is on the sidelines.
Competitive and collective austerity has trapped the whole of Europe in a vicious circle of low demand, declining confidence and private sector shrinkage. Every announcement of expenditure cuts has lengthened the tunnel rather than bringing the light closer. The re-election of Mr Sarkozy would not have changed this sorry saga. On the central macroeconomic question he promised more of the same. But “procyclical fiscal drag” is the problem, not the solution.
Enter Mr Hollande. He was selected as presidential candidate by the French Socialist Party in a welcome outbreak of electoral realism. He comes from the pragmatic, not to say technocratic, centre of the party. Mr Hollande knows an economic cul-de-sac when he sees one. He lived through the 1981 Mitterrand experiment and has no interest in a retreat to the land of economic make believe. But you don’t need to live in the past to seek an alternative to economic masochism.
The danger is not that Mr Hollande is too “dangerous”. The truth is that the current policy mix is unsustainable. A new framework will come in the end. The only question is whether it is done through design or collapse. The challenge for Mr Hollande is to confront the flawed policy consensus of austerity — but also boldly to embrace reform.
He has talked of renegotiating the fiscal pact, balancing it with a growth pact and rebalancing the European economic equation. In this he is surely correct. The IMF believes this. The Obama administration is praying for it. The balance between short and medium-term deficit reduction and the respective roles of creditor and debtor countries have been unmentionable around the European Council table for too long.
Those in the technocratic centre, such as Mario Monti, the Italian Prime Minister, and on the Centre Right, such as Mariano Rajoy, the Spanish Prime Minister, will not open the debate, but they will join it. The European Central Bank knows that current policy is inadequate. This is not a matter of dogma. As President Obama likes to say, it is just maths.
Two moves will be necessary to make any shift possible. Mr Hollande’s commitment to commission the French auditors’ court to report by June on the state of the French public finances — and to act on its conclusions — will allow him to show that he is serious about budgetary prudence at home. He cannot afford to waste this opportunity.