Austerity programs for the region’s weakest economies firmly in place, IMF chief Christine LaGarde and Germany leader Angela Merkel should have been able to spend their summers on vacation. Europe’s financial reputation had been restored by a series of sharp budget cuts across the European Union from Greece to Spain to Italy. International capital markets investors no longer had a reason to desert sovereign paper or punish the bonds of the EU nations with huge and uncontrolled national debts.
The elections in Greece and Spain will keep LaGarde, Merkel and the finance ministers of Europe in their offices and meetings as they try to prepare for an outright revolt against austerity that began over the weekend and likely will spread as unions and people out of work around region protest in the streets of many of the recession-troubled nations that have also cut government expenses to the bone. Nicolas Sarkozy, an advocate of national expense cuts, was thrown out as the president of France, and François Hollande, who promises to challenge Merkel’s austerity plans, replaced him. In Greece, the New Democracy and socialist Pasok parties have apparently lost the grips they have had on parliament for decades as the anti-bailout party Syriza and smaller like-minded factions gained strength.
Austerity as a way to manage the EU debt crisis has only been in place a few months. The coming differences between the new leaders in France, and probably Greece, and the forces that believe government cost cuts are the only means to settle Europe’s debt crisis likely will determine the financial health of the region for years, and perhaps longer.
The essence of the austerity debate has not changed. What has is that it appears the debate had ended and Germany’s hard stand for austerity had won. Nicolas Sarkozy of France had become an ally of Merkel’s, even though he thought her approach to costs cuts was too extreme. With Europe’s number one and number two economies in agreement, and with support from the IMF in place, the way out of Europe’s financial crisis had been settled. The EU had cobbled together what appeared to be $1 trillion in commitments for a bailout fund. The IMF raised close to $270 billion to support the region, and Lagarde said there might be even more commitments to those funds.
The upcoming discussions, which are likely to be rancorous, will turn to whether any of the new capital available for bailouts can be used for stimulus. This would require another round of meetings among the region’s finance ministers, which will take months — certainly the entire summer. It also will require an almost complete reversal of field about austerity by Germany and supporters among the financial ministers of its allies. The IMF would have to alter its approach to the region’s finances, which would need at least the tacit approval of its members who have put the largest sums into the fund.
Even if the entire process of deciding whether some portion of the severe austerity measures pressed onto some of the weak nations in the region can be set aside at least partially in exchange for some stimulus, the investors who began to abandon debts issued by many of the countries of Europe during the last Greek crisis will begin to desert them again.
The summer vacations of Europe’s top leaders will not be spent at resorts. Instead, the season will be one of the most wrenching periods in Europe since the global financial crisis began four years ago.
Douglas A. McIntyre