BERLIN — In the volatile aftermath of raucous elections, which nearly destroyed the political establishment in Greece and ended 17 years of conservative reign in France, the emphasis across Europe, even in the austerity heartland of Germany, has shifted to the very real problem of growth for the stagnant Continent.
But there are few ready answers for how to turn around recessionary economies during a major sovereign debt crisis, and it will take weeks of contentious wrangling to determine whether the Germans can be pressed to make more than cosmetic changes to their focus on fiscal discipline for all.
At the ascetic end are modest concessions by Germany to repackage existing initiatives to be more supportive of growth. At the opposite extreme, particularly in countries plagued by soaring unemployment, are calls to unleash the European Central Bank to intervene more aggressively in bond markets and for governments to use the credit of the strongest European countries to support growth in the weaker ones through common “euro bonds.”
Francois Hollande, who defeated President Nicolas Sarkozy in Sunday’s runoff election in France, has provided a rallying point for those across Europe who support stimulus spending to promote short-term growth as the way out of the crisis. But he will face a difficult path if he cannot budge Chancellor Angela Merkel of Germany away from her insistence on austerity.
“By himself, Hollande cannot change the world,” said Peter Bofinger, a prominent economist on Merkel’s independent council of economic experts. “There are laws of economic gravity, and if he alone says ‘I’m willing to accept higher deficits,’ the risk is high that the markets will force him to give in.”
Bofinger said that what was needed was to slow down spending cuts for countries in the midst of recession and “a transfer of fiscal sovereignty to the euro-area level” as a step toward euro bonds. But he said that such an approach was still extremely unpopular in Germany.
Merkel left no doubt about whether she was ready to embrace the most radical measures, strongly rejecting Hollande’s suggestion that European leaders reopen a compact on deficit reduction that they adopted in March.
“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable,” Merkel said at a news conference in Berlin. “It has been negotiated and has been signed by 25 countries.”
Hollande’s victory is a significant moment in Europe’s continuing efforts to manage the crisis, ejecting Merkel’s closest collaborator, Sarkozy, from office. But it remains to be seen whether Hollande’s election is a real turning point or Merkel is able to stick to austerity while making only symbolic gestures toward flexibility on the margins.
“Everyone’s talking about some kind of space between structural reforms, like liberalizing labor markets, and the kind of direct stimulus Germans call crude Keynesian measures on the other hand,” said Hans Kundnani, a Germany expert at the European Council on Foreign Relations.