Q&A: End of austerity?

French anti-austerity protesters
Image caption Are anti-austerity protesters about to see a new dawn?

Socialist Francois Hollande has won France's presidential election, having promised to renegotiate a European agreement aimed at cutting government debt.

Mr Hollande believes the EU must refocus its efforts away from austerity to growth.

"Europe is watching us, austerity can no longer be the only option," he says.

But is it possible to end austerity in Europe?

What is austerity?

Government austerity measures include higher taxes and spending cuts. The aim is to reduce a country's deficit - the amount it spends every year over and above what it earns.

Following the financial crisis, government debt levels - that is, the sum of all borrowing - rose sharply. With companies, in particular financial institutions, making less money during the ensuing recession, tax revenues fell. Governments were also accused of having spent too much during "the good times" and then came under pressure to spend more on rescuing banks, battered in the wake of the credit crunch.

There was widespread agreement among leaders and international institutions that introducing austerity measures was the best way to tackle the debt crisis. It was said that markets would "punish" any countries not doing enough to slash their deficits by making it even more expensive for these cash-strapped countries to borrow.

What is the problem with austerity?

Austerity measures are hugely unpopular with the public, as they typically result in cuts to public services, higher retirement ages and reduced public sector wages and pensions.

Another criticism is that austerity stifles growth. "Austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues," the ratings agency Standard & Poor's said when it downgraded France and other eurozone countries earlier this year.

As many major economies are struggling to recover from recession, Mr Hollande is not alone in believing that focusing on growth assistance is much more important. Many economists share that view, including Nobel Prize winner Joseph Stiglitz.

Some point to the US , which has chosen not to cut spending as far and as fast. But while the US's economy has grown faster than say, the UK's, its economic growth rate is nevertheless slowing and unemployment is still high, leading others to argue that the US's approach has not necessarily been more successful.

What are the alternatives?

Some have argued from the beginning of the crisis that austerity was not inevitable.

Some say that spending should be targeted at boosting growth. For others it is a question of how savings are made.

Olli Rehn, the EU's commissioner for economic and monetary affairs, says Europe needs to get the balance right between cutting debt and stimulating growth.

"Fiscal consolidation, while necessary, [needs to be] done in a growth-friendly and differentiated way, in order to strike a balance between necessary fiscal consolidation and concerns for growth," he says.

What does Mr Hollande propose instead?

He campaigned to renegotiate the EU fiscal pact, in which countries signed up to strict budget limits, to put more emphasis on growth.

To stimulate growth in France he has pledged to create 150,000 new jobs. He also said he would introduce two new higher tax rates, implement a new financial transaction tax and increase capital gains taxes on banks.

However, some say that this may just be a different kind of austerity - hitting the rich with higher taxes.

Is it possible to renegotiate the fiscal pact?

The EU's fiscal pact has been signed by 25 of the 27 EU states, and is now in the process of being ratified in individual countries. It aims to make governments more disciplined about their finances, and is intended to convince the markets that government finances won't be allowed to get out of hand again.

It will be interesting to see how Mr Hollande's pledge to renegotiate the pact, to focus more on growth, plays out.

BBC World Service's economics editor Andrew Walker says that a few weeks ago that looked like it might upset Europe's laboriously agreed plans. But there are now signs of a wider shift of emphasis in the eurozone - more on growth, less on austerity - meaning Mr Hollande could probably be accommodated.

But Pippa Malgrem, president of Principalis Asset Management, says newly elected leaders who wish to move away from austerity will be constrained - by decisions made by their predecessors, as well as by "economic facts". These countries are still required to make debt payments and therefore have to tighten their belts, she says.

Germany has categorically ruled out renegotiating the existing EU pact, but seems open to the idea of a separate agreement to create growth and greater competitiveness.

German Foreign Minister Guido Westerwelle has stressed that growth does not have to be achieved by spending more, but can also be achieved through structural reforms to improve competitiveness "and spending better the money that we have".

What about in Greece? Could the bailout fail?

The future of Greece is once again in doubt following the country's latest election, where no party won more than 20% of the vote.

With none of the leading parties able to form a coalition government, a new election has been scheduled for 17 June, prolonging the political crisis.

Some analysts have warned that Greece could run out of money in June without a government to negotiate the next tranche of its bailout, which is paid in instalments according to strict criteria.

If so, Greece could conceivably end up leaving the euro.