Europe: Things fall apart

Dutch coalition talks at Catshuis, The Hague, 28 Mar 12 Dutch PM Mark Rutte (standing, right) failed to get a coalition deal on budget targets

The eurozone crisis is not just back. It has returned in a much more dangerous form. This time the questions are more fundamental.

The doubts about the whole austerity strategy - made in Germany and policed by EU officials - are openly expressed.

The French elections lay bare the fault lines. If the Socialist candidate Francois Hollande wins he will not just be the first victor from the Left in France in 17 years. He has put down a marker - that he will challenge German leadership of the debt crisis.

Mr Hollande believes that austerity first is destroying parts of Europe. Yes, deficits have to be cut, but his priority will be growth. He has pitched his statements not just to the French people but to the rest of Europe. He wants to reorientate Europe on a path of growth and employment. It was not a surprise that yesterday Angela Merkel's spokesman at the German Chancellery said she still backs President Sarkozy.

The crisis, for a period, was confined to mainly southern European countries like Spain, Italy, Greece and Portugal. It has now spread to the core.

The Dutch government, which had been an advocate of the strict austerity medicine, has collapsed. It found itself struggling to meet deficit targets. The government could not agree on the budget cuts needed to meet the targets set by EU officials.

The far-right politician Geert Wilders said "we don't want our pensioners to suffer for the sake of the dictators in Brussels". So the Netherlands drifts, awaiting elections in September, fearful that its AAA credit rating is at risk.

The fall of the Dutch government undermines the pact to enforce budgetary discipline in the eurozone agreed in December. This was Angela Merkel's great project to ensure that ill-discipline and overspending never haunted the currency union again. It already looks tattered.

Challenge from voters

The Spanish have challenged EU targets for reducing the deficit. Now, too, the Dutch. Francois Hollande promises to renegotiate the pact if elected French president, and shift the emphasis towards growth. The flaw of the pact is that politicians and governments in the end will listen to their voters.

The Germans are rattled. The foreign minister says the pact must remain in place. "What we have agreed on in Europe to overcome the debt crisis", said Guido Westerwelle, "is agreed and it holds".

"It will not be made dependent on election results." That is, of course, part of the problem because electorates want their votes to count.

The European economy is weakening. Even in Germany there is a sharp fall in manufacturing activity. Spain officially went into recession yesterday. Despite reductions in deficits, debt levels are still rising. Unemployment is increasing.

All of this reinforces the question: is the strategy for cutting deficits and depending on structural reforms to boost growth working?

Across Europe there are signs of revolt. In France 6.5 million people voted for the far-right candidate, Marine Le Pen. Over 30% of French voters supported candidates who rejected austerity and were hostile to Brussels. The mood is one of deep disaffection towards mainstream parties. The elite is struggling to control the narrative.

On the same day that the French will return to the polls to elect a president - 6 May - the Greeks will go to the polls. A majority of Greek MPs elected may well challenge the austerity terms of the second bailout demanded by the EU, the European Central Bank and the IMF. It was announced today that the Greek economy this year will shrink by 5% - the fith year of recession.

The problem is this: these countries - in a monetary union - cannot devalue. Their only remedy is internal devaluation, cutting wages and pensions in the hope that they can restore competitiveness with Germany. For many what lies ahead is years of hardship and austerity. It is a tough sell.

Difficult days are looming. A few months back Germany was dominating the argument in Europe. It is now much more isolated. Debt and deficits have to be reduced, but cuts to budgets and to social programmes are feeding into an unpredictable resentment in Europe.

Things fall apart.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 297.

    The US govt owes $16Tn, about 100% GDP mostly to its own citizens.Much of it is long term that can't be redeemed before maturity.It owes $1.2Tn to China, about 7% US GDP.It's not a problem.Even with low interest rates assured by the Fed through late 2014 USD remains the world's only reserve currency.Euro lives on borrowed time.US economy is recovering slowly.US will survive,prosper, EU won't.

  • rate this

    Comment number 296.

    margaret howard (271),

    “... Europe is the testing ground of human experimentation ...“
    Is that what certain doctors in the middle of the 20th century said?

    “... and if it doesn't work we try again ...”
    That’s what the world is afraid of.

    “... That's how we've lasted thousands of years while empires rose and fell ...”
    Are you aware that many of those empires were European?

  • rate this

    Comment number 295.


    Re ESA

    Since the '80's there have been various proposals for a new manned vehicle. They think about it, spend and ton of money on studies and then abandon it. Then a few years later they start over. In the interim they've launched some cool space probes and science sats. Right now they pay the Russians to fly their people... No wait, that's NASA! Well, ESA does exactly the same thing!

  • Comment number 294.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 293.

    This comment was removed because the moderators found it broke the house rules. Explain.


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