After a brief holiday from the headlines, the European Crisis is set to resume center stage again.
The austerity-minded president of France has lost the first round of French elections and the similarly minded government of the Netherlands has fallen. Meanwhile, Spain and other European economies continue drifting into recession and depression. It remains to be seen what fresh political voices and forces will emerge to offer coherent alternatives for arresting the Euro Crisis and putting economies on a path to future prosperity.
In France, voters chose Socialist François Hollande over sitting President Nicolas Sarkozy in the country's preliminary election on Sunday. Hollande emerged with roughly 29 percent compared to Sarkozy's 27 percent, while radical right National Front leader Marine Le Pen earned a record 18 percent. The two top finishers, Hollande and Sarkozy, proceed to the final on May 6, but Le Pen’s strong showing means her constituents will play an outsized role in the outcome.
It is the first time in 50 years that a sitting president of France has not won the first round of voting and it signals the broadest opposition yet to the Franco-German “Merkozy” (Angela Merkel-Sarkozy) program of economic austerity in service to bank debt as the solution to the Euro Crisis.
French voters veered both left to Hollande and right to Le Pen, sending a resounding “anyone but Sarko” message. Sarkozy's only workable strategy now is to aim rightward and peel supporters away from the National Front. It won’t be pretty. There will be rough talk on immigration and jobs and an even stronger “La France Forte” message emanating from his party. But Sarkozy is a strong showman and is looking for up to three televised debates to turn the tide.
Many analysts, media and polls are predicting Hollande will win the presidency in a few weeks. (To Americans, French elections seem blissfully quick; the candidates announced in February/March of this year and the whole thing will be over by May.) Far bigger challenges will remain, for France and for Europe, after the next president is chosen.
In the Netherlands, long viewed as a bastion of fiscal rectitude (with its rare triple-A credit rating), the government fell from power on Monday after failing to agree on how to cut the country’s 2013 national budget to meet the 3 percent EU deficit limit — a limit the Dutch government itself supported in December’s EU fiscal treaty negotiations. Far-right Freedom Party MP Geert Wilders bolted the governing coalition, ending its single vote parliamentary majority, forcing right wing Prime Minister Mark Rutte to deliver his resignation to the Queen. A multiparty scuffle now begins over scheduling upcoming elections.
Taken together, these events, combined with the looming specter of the large Spanish economy now accelerating in a downward spiral — Spanish youth unemployment is above 50 percent — and continuing concerns in Italy, Ireland and elsewhere, make the Greek drama over bond “haircuts” a few months back look positively minor in comparison. The developments will continue to loom over economic forecasts for the United States and for state governments, including here in the Pacific Northwest. Already, aviation industry leaders say they expect increased difficulties in securing bank financing for jetliner purchases as European banks retrench from that line of business.
As the German-led austerity remedy fails to intercept the trajectory of recession and depression across Europe, new political voices will emerge in the cracks of the political edifice that is the European People’s Party (EPP). Mostly unknown to Americans, the EPP is the center-right trans-European political meta-party that includes 74 different member parties, holds the largest bloc in the European Parliament and whose members hold the presidency or premiership in 22 different countries. The EPP was a force for pan-Europeanism and remains a major player in pan-European economic governance. EPP leaders have championed bank-friendly economic policies but as austerity runs aground on the rocks, EPP leaders are bound to face political challenges across the map, just as in France.
Recently, from some usual and not-so-usual places, a variety of alternative resolutions to the Euro Crisis are being offered that go far beyond the austerity mantra. Running through most of them are heavy doses of pragmatism and healthy servings of shared sacrifice. With them comes the hope that at last a broader public and political conversation will occur that is long overdue.
A recent Boston Consulting Group report (registration required) recommends a three part solution: keeping interest rates below growth rates, pooling excess debt across the Euro Zone, and surprisingly, a modest 20-year Europe-wide "wealth tax," all of which combined could work out the crisis over some years while preventing the fix from knocking whole economies into reverse and causing larger political crises.
From the radical thinkers at the University of Missouri, economist Michael Hudson presented a dense, riveting paper to the Institute for New Economic Thinking last week that tackles a sweeping history of debt writedowns; the political imperatives for deploying them, and an intellectual basis for wrapping one's head around the need. "Imposing austerity on debt-strapped economies is a product of political lobbying to promote... a distorted map that benefits the financial sector... the longer that economies keep subsidizing the debt overhead, the more they will shrink."
Hudson's recommendations include applying the legal principles of fraudulent conveyance, legislating reasonable paydowns, creating a public credit infrastructure in addition to a private one, and most radical of all — public debt cancellation — precisely as was done in Germany in 1948, after World War II, a key driver of the post-war "German Economic Miracle".
Hudson's paper is worth a read if only to garner that there are a broad range of policy options for Europe beyond lockstep austerity. Most are political in nature and will require fresh political leadership in order to accomplish. Just now in the crisis are we beginning to see the fissures from which that kind of leadership may emerge.
A grimmer alternative is that the nations of Europe retreat into nationalism. Billionaire businessman George Soros' analysis explains how a renationalized Europe would present an even greater set of political hurdles:
At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines... If this continues for a few more years, a eurozone breakup would become possible without a meltdown — the omelet could be unscrambled — but it would leave the creditor countries’ central banks holding large, difficult-to-enforce claims against the debtor countries’ central banks.
The prospect of all of Europe's governments holding a thicket of giant, unpayable debt claims against each other in an environment of rising nationalist politics after the failure of the common currency is untenable for reasons too obvious to mention.
Across Europe, there is recognition that some sort of inflection point in the crisis may be nearing. There is far less clarity about what precisely that means or what can become politically achievable beyond the austerity dogma — but more than since the crises began, voters are now beginning to carve out space for politicians to work more broadly supportable solutions. If not, the voters seem to be readying to replace them.