BERLIN — The outlines of a potential compromise in Europe’s battle between deficit-cutting austerity and policies to promote growth has begun to take shape. The question is whether the kind of cautious measures palatable to Germany, austerity’s champion, will do enough to combat the Continent’s imbalances and do it soon enough to put its weaker countries on more solid economic footing.
In typical German fashion, the steps under discussion are incremental and spread across a range of policy areas so as not to raise the ire of German voters. Germany’s rigid central bank has signaled a willingness to tolerate slightly higher inflation, while the government has indicated its openness to modest but real wage growth in Germany.
Most important for the stricken economies, the German chancellor, Angela Merkel, may be prepared to accept a longer timetable for curtailing budget deficits for countries like Spain that are reeling from recession. For Merkel, the most important prize is ratification of the financial compact, signed in March by the leaders of 25 of the 27 European Union countries, to control deficits in the long run.
Ever since the victory of Francois Hollande in the French presidential election on Sunday, the debate in Europe has shifted, with attention focusing on Merkel’s growing isolation over austerity and whether she would yield to calls for stimulus spending to promote short-term economic growth.
The recognition seems to be dawning even here that forcing heavily indebted countries to cut spending too quickly and deeply can be counterproductive. “The mood appears to be shifting in Germany,” said Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations in Berlin. “Even conservative economists are beginning to question whether this austerity is too brutal at the moment.”
Despite marked differences in tone between Merkel and Hollande, they may not be so far apart in substance, said Mujtaba Rahman, an analyst at Eurasia Group, a consultancy in New York. Germany may ultimately accept minor adjustments to Greece’s aid program if a viable government emerges, Rahman said.
“This is Germany’s way of signaling both to Hollande and the Greek political elite it is willing to be constructive to keep the system together,” Rahman said.
German officials have been adamant in their public statements that there would be no renegotiation with the Greeks of the terms of the bailout. The sharp reduction in public spending in the teeth of a recession has sent Greek unemployment over 20 percent and, in Sunday’s elections, brought radical parties on the right and left into Parliament.
Speaking at a news conference in Berlin on Thursday, Finance Minister Wolfgang Schauble repeated Germany’s mantra that Greece had to stand by its commitments, but this time he added the new element that Berlin could tolerate a slightly higher inflation rate.