Originally from our sister publication, Advisor.ca.
The dream of a closely integrated European economy appears to be fading. Over the weekend, voters in France and Greece booted out the leaders who have struggled to contain the European sovereign debt crisis and end the Eurozone recession.
In both cases, voters rejected austerity as a means of curing the social and economic ills that plague the Continent, shifting support to advocates of greater stimulus (in the case of France) and rejecting the terms of already-received bailouts (in the case of Greece).
While Greece has been the central focus of the European crisis over the past two years, the results in France are undoubtedly of greater significance.
Socialist candidate François Hollande has vowed to renegotiate the recent “Fiscal Compact” with economic powerhouse Germany. That pact had called for government spending cuts as a cure for soaring debt levels.
During his campaign, Hollande argued that debt reduction should take a back seat to economic growth. Once the Eurozone economy was back on its feet, he said, the debt could be better addressed.
“Renegotiation of the Fiscal Compact looks unlikely,” writes James Goundry, country intelligence analyst, IHS Global Insight. “EU leaders expended considerable political capital to agree the compact in the first place, two countries have already ratified the document, and [German Chancellor Angela] Merkel will be extremely reluctant to reopen the treaty and risk a raft of amendments.”
Goundry expects a separate “growth pact” is more likely, which may include some of Hollande’s platform planks, such as: more funds from the European Investment Bank; the deployment of unused EU cohesion funds. Less likely is the use of EU project bonds to support infrastructure investments, or a tax on financial transactions.
While the media may overdramatize the conflict between Merkel and Hollande, Goundry points out “both are ultimately pro-European and pragmatic politicians, and… have nothing to gain from imperiling the future of the Eurozone.”
Greece
Meanwhile, at the eastern end of the Mediterranean, both the “centre-left” and “centre-right” parties that dominate Greek politics were handed a drubbing at the polls, thanks largely to their acceptance of European bailout funds, and the austerity attached to that aid. Parties on both the far-left and far-right made gains.
“The result means that the pro-austerity parties will be unable to form a grand coalition with an absolute majority, putting in doubt Greece’s ability to honour the austerity measures agreed with the EU and IMF as part of two bailouts,” Goundry says.
“Any new government seems likely to attempt to renegotiate the country’s Memorandum of Economic and Financial Policies agreed with its international creditors. Political uncertainty is likely to continue in Greece in the short and medium term.”
If there is any good news in the rise of more radical parties in Greece, it is that both the far left and far right advocate abandoning the euro, which might be good news for the rest of the monetary union.