François Hollande’s victory in the French presidential election last week was not an antiausterity backlash, as suggested by international headlines. It was much more about ousting a President whose style exasperated many, and replacing him with a candidate who ran on a social justice ticket and gradually displayed an appealing presidential posture. On the Place de la Bastille, where supporters of the socialist candidate gathered on the night of the election, I overheard many “Sarkozy, c’est fini!” but no mentioning of Angela Merkel or of structural reforms.
Whatever the prime motivation of French voters, Hollande was elected on a pro-“growth” agenda that calls into question the austerity consensus that prevailed under his predecessor and Ms Merkel. He wishes to renegotiate the fiscal responsibility pact that was agreed among European leaders. Hollande needs fiscal flexibility in order to implement the domestic policies he promised, such as creating new government jobs.
Sarkozy had the energy and political competence to deal with critical situations, and he deserves credit for keeping the boat afloat. Yet his cooperation with Merkel failed to deliver desperately needed results, and the overall impression was that Europe kept “muddling through”. Hollande’s victory offers a window of opportunity for the European Union to draw a different path to recovery, one that respects the European tradition of social democracy and promotes the further integration of European countries. I would argue that confidence, which crucially lacks in such a crisis, could be restored by this new political landscape.
First of all, it is confidence in the European economy that is at stake. The revived debate between advocates of “austerity” and the proponents of “growth” should be welcomed. The former rightfully stresses the long-term benefits of returning to fiscal responsibility. In the short-run, however, this has adverse effects on growth, employment, and a country’s ability to service its debt, especially when the economy is already in a slump. The problem is, while every European politician supports the idea of growth, there is no consensus on how to achieve it. For Hollande it means relaxing the austerity pact, while the ECB and the Germans support structural reforms – such as labor market reforms – in deficit countries. I am not suggesting that fiscal tightening isn’t necessary – it is. The point is that focusing solely on budget slashing offers no positive short-run prospects for the economy. The challenge now is to show a clear commitment to achieving fiscal responsibility, while increasing growth-enhancing investment through the European Investment Bank and the creation of project bonds. “Growth” is easier said than done, but committing to it is likely to enlighten the prospects of Europe’s economy, in the eyes of both investors and consumers.
Secondly, confidence in the European political process must be restored. The response of the EU to the crisis, advocating smaller government and deregulation, has further tarnished its image across Europe and created political instability, especially in the periphery. The success of extreme parties, in France and Greece for example, is no coincidence. The way out of the crisis will involve new institutions, greater integration and a shared sense of responsibility. The imbalances built up before the crisis must be restored. This involves not only necessary reforms in the periphery, but also greater sacrifices by surplus countries such as Germany – who have benefited hugely from the euro – meaning that they must let their economies inflate to close the gap in competitiveness. The adjustment process will have to be symmetrical, involving all countries of the Eurozone. Ultimately, if Europe is to have a binding agreement on fiscal responsibility, it will also have to move toward some form of fiscal integration. In Canada, imbalances between the provinces are adjusted through transfers, managed by a federal government. There is no equivalent yet in Europe. Reforms to liberalize European labour markets, however, are a precondition. Finally, the creation of eurobonds, which would give peripheral countries the ability to borrow money at lower rates, will have to be considered more seriously. Germany must eventually acknowledge the fact that its own self-interest lies in putting the eurozone cohesion above imposing the cost of adjustment on others. By restoring the image of the EU leadership and pursuing further integration, my hope is that Hollande can revive a sense of Europeanism, so essential to the existence of the euro.
The months ahead will involve politically difficult reforms and crucial decisions. The exit of Greece from the euro could have insurmountable consequences. But if it succeeds in preventing a panic, the EU will emerge stronger as the crisis clearly calls for greater European integration. It also provides a historic opportunity to modernize the role of government: one without excesses but one that still serves the purpose of social democracy in a globalized context. This opportunity should not be missed. The popular legitimacy and the very survival of the euro depends on it.
– William Debost