Growth versus austerity

 
Francois Hollande and Alexis Tsipras (R) on 6 May 2012 Francois Hollande and Alexis Tsipras celebrate election results in France and Greece

The anti-austerity backlash - as seen at the polls in France and Greece - is already shaping a new debate in Europe.

European officials who only recently were revelling in their role as anti-debt enforcers are born again as growth enthusiasts.

On 23 May, Herman Van Rompuy, the President of the European Council, will host an informal "growth" dinner. Earlier this year David Cameron fought to have some of his ideas for growth included in the conclusions at a summit.

But it has taken the success of Francois Hollande in France to bring urgency to the pursuit of growth.

Europe's leaders will address a conundrum that divides economists: can you have austerity and growth at the same time?

False choice
German Chancellor Angela Merkel (10 May 2012) The German chancellor is due to meet Francois Hollande next week

The IMF chief Christine Lagarde is among those who insist that growth versus austerity is a false choice. She believes both can be achieved but she has also warned of the risks in cutting spending too sharply.

This argument will surface next week when Francois Hollande has his first meeting with German Chancellor Angela Merkel. He will - in the most diplomatic way - tell her that the French people have given him a mandate to make growth his priority.

What she will not allow is for French voters, in effect, to open up for renegotiation her treasured pact enforcing discipline over budgets in the eurozone.

However, the Germans cannot allow a rift with France which would be very damaging. So the expectation is for some kind of growth pact to be attached to the fiscal pact.

This is where it gets interesting. Mrs Merkel believes that growth best comes from structural reforms - making it easier to hire and fire workers and opening up professions.

Big-ticket projects

That is not Francois Hollande's idea for growth. For a start, such reforms would pitch him into a fight with the French unions. He wants to see spending - particularly at the European level - on big-ticket projects like infrastructure and energy technology.

The EU Commission wants to bolster the European Investment Bank's paid-in capital by 10bn euros so it can increase its lending capacity for projects like motorway building.

Some of these ideas may get German backing.

What the German chancellor won't agree to is for countries to increase spending through borrowing. She will also resist any pressure to allow the European Central Bank to lend directly to governments.

The official EU position was set out by President Barroso. "There must be no let-up in our focus on stability," he said, whilst accelerating structural reforms.

The problem can be seen in a country like Spain. It has embarked on structural reforms but they take time. And in the short term, regional governments, companies and households are paying down debts.

The reforms may well boost growth in the future but, in the present, countries like Spain appear to be locked in a cycle of decline. Which is why much of the debate will focus on whether some of the deficit-cutting targets may be eased.

'Precarious'

But the Germans will be wary in sending that signal to France. Peter Altmaier, who is close to Angela Merkel, described France's finances as "precarious" and then went on to say that "any country that attempts higher deficits... there simply isn't any wiggle room".

For the moment, the Germans favour austerity and reforms that might deliver growth down the road. That, of course, may not satisfy the voters. And therein lies a problem with monetary union.

As the German paper, Die Welt, wrote recently over the French and Greek elections: "In the end the results are proof that Europe doesn't work. Countries still debate within their own national borders because there is no European public space."

Voters may not give Europe's leaders time to work out how exactly you get growth while cutting deficits and reducing debt.

 
Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    0

    Comment number 294.

    @291
    Thanks for the info.

    What makes me nervous is that there are again people in the EU who advocate an attenuation of the bailout conditions for Greece. This will make Syriza even stronger and may lure other southern countries into following Greece's example.

  • rate this
    0

    Comment number 293.

    http://www.bbc.co.uk/news/world-europe-18041223

    The end is certain. It's only the route that's in question.

  • rate this
    -2

    Comment number 292.

    @290 A conservative estimate that the Greek govt is owed at east 60 billion euros in back taxes by companies, private persons etc. The actual amount may well be considerably higher. The tax administration is so chaotic that, quite simply, nobody knows.
    Add to this the massive fraud over the years re pensions, invalidity benefits etc and it's little wonder that the country is bankrupt.

  • rate this
    +1

    Comment number 291.

    #287 austriacus

    "I wonder whether anybody has made a sum-up of the amounts of subsidies Greece has received during the years of EU-membership, just to get a feeling"

    Overall, Greece has absorbed 240 billion euros in European aid over three decades - the equivalent to the country's GDP in 2010.

    Source--

    http://www.asiaone.com/Business/News/Story/A1Story20100430-213345.html

  • rate this
    -2

    Comment number 290.

    287And I wonder if anyone tallied how much tax money wealthy & upper middle class Greeks should have paid over the years that they didn't.How much was spent on make work and even no show Greek govt jobs. How much was overpaid and is still overpaid to Greek govt workers and pensioners compared to what their work was actually worth.Until this corrupt system is fixed Greece and the EU can't be saved.

  • rate this
    0

    Comment number 289.

    Discuss This Saturday

    [Unsuitable/Broken URL removed by Moderator]

  • rate this
    0

    Comment number 288.

    @271 D Bumstead
    I couldn`t agree more. Greece was able to offer bonds for artifically low interest rates ever since the euro was introduced. That`s pretty much the economic stimulus so many seem to demand for Greece right now. But tossing even more money into an unreformed Greece is equivalent to flushing it down the toilet.
    Problems cannot be solved by the same level of thinking that created them

  • rate this
    0

    Comment number 287.

    I wonder whether anybody has made a sum-up of the amounts of subsidies Greece has received during the years of EU-membership, just to get a feeling

  • rate this
    +3

    Comment number 286.

    be careful you rich .1%. push the poor to far and the balance of power will swing back to the masses (where it belongs) and all your wealth will count for nothing. Is revaluotion in the air?

  • rate this
    0

    Comment number 285.

    @274. Nuk3d
    Simple answer? The wealth generating parts of the economy (except financials) have declined to the point where gov spending represents too big a part of the econmy. Gov stops spending and laying people off (austerity) and nobody has money to buy anything (no growth.) We need to get ourselves out of the situation where gov spending is the only financial stimulus.

  • rate this
    0

    Comment number 284.

    Athens News

    5.45pm Finance Minister Filippos Sachinidis has said he asked Prime Minister Lucas Papademos to decide whether the country will pay a remaining amount of 430 million euros of a bond maturing on May 15, which was not part of a major bond swap. "I have not taken a position on whether the bond should or should not be paid,"

  • rate this
    +2

    Comment number 283.

    238 TimOthy
    "Wall street and Republicans ..gutted the Dodd Frank act which was supposedly to clean up and regulate the US financial services industry.
    ==
    They are too rotten to be cleaned up. If we don't watch out, their horrible greed and double dealing will bring the whole world down. You know what they say; "Lie with dogs and you wake up with fleas."

  • rate this
    +2

    Comment number 282.

    263 austriacus
    "it was actually the U.S. government that has stopped the better engines from being sold in the U.S."
    ===
    Nothing new here - this is not just a currency war but trade as well. But take the Airbus-Boeing affair - despite a dirty tricks campaign, in 2011 Airbus received 1,410 orders against Boeing's 643, less than half. Quality and superior technology will triumph.

  • rate this
    -1

    Comment number 281.

    http://news.bbc.co.uk/2/hi/programmes/hardtalk/9720133.stm

    I think they're whistling past the graveyard.Germany demands Greece stick to its bargain.Even if that were possible Greeks voted 2 to 1 for parties that said they would oppose it.There's a pretense that a compromise is still possible.How long can they keep this facade up? How long before the fireworks begin?Contagion is still the fear

  • rate this
    -4

    Comment number 280.

    278Agreed. A good method to cut entitlements is to means test Social Security and Medicare benefits.Wealthiest Americans don't need them, they have vast financial resources,they shouldn't overtax the system. They don't need either to enjoy their retirement free of financial worry. Buffet rule 2. Europe could start to cut its own overbloated govt spending by doing the same & cutting govt pensions

  • rate this
    -1

    Comment number 279.

    http://www.bbc.co.uk/news/business-18033974

    Economic forecasts are notoriously unreliable.We're much better at predicting the weather now.In 2007, even as late as early 2008 most major respected forecasters predicted there would be no recession.Then the bottom fell out.It's hard to see how there will be a turnaround in 2013 in Europe with the Euro in dire crisis and major economies in trouble

  • rate this
    -3

    Comment number 278.

    Also, why do you say the overspend is on welfare, rather than say, nuclear weapons, prison sentences, military, US wars, tax concessions for some, etc?




    Look at a pie chart at the end of each 1040 US Tax From and you'll get the picture.

    Rouly 2/3rds of US budget, and growing are ENTITLEMENTS,
    hardly anybody dares cut.

    While US Defense budget is shrinking. [please, check!]

  • rate this
    +3

    Comment number 277.

    274.Nuk3d

    "...It should be possible to stimulate growth whilst still cutting the vast over-spend of our welfare state..."

    ===

    In principle perhaps, but the employees in the affected areas are participants in the economy.

    Also, why do you say the overspend is on welfare, rather than say, nuclear weapons, prison sentences, military, US wars, tax concessions for some, etc?

  • rate this
    -2

    Comment number 276.

    The problem is that the public are too stupid to be in-charge, and politicians too much.. well.. like politicians. I have always maintained that decisions should be made by a board of scientists.People that don't guess, people who don't argue, people who are well informed, whom aren't corrupt and are intelligent. People who know that the correct decision is better than the popular one.

  • rate this
    0

    Comment number 275.

    Mikis Theodorakis (octogenarian) is now heating up the old Civil War hatreds in Greece.

    " saying he will be "present". "I will take part in (upcoming) elections, however, with whom and how is something I will announce later. I will be on the front-line,"

 

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