The eurozone is turning away from stringent austerity policies and toward those that stimulate demand. President-elect Francois Hollande, the first socialist president since Mitterrand, plans to raise taxes on the rich to meet some of his growth objectives. However, without a credible debt reduction plan, Hollande risks a loss of confidence among investors and bondholders.
GROWTH AND AUSTERITY—A GLOBAL PROBLEM
The U.S. got certain things right these past years of recession, which is why we are in better shape than Europe now. And we got certain things wrong, which is why our recovery seems to have a serious vitamin deficiency.
In the “right” column, Americans did not go after federal deficits and budget overruns with no thought of the demand side of the economy. This included a large stimulus package and bailouts for American financial institutions with their backs to the wall.
The Europeans missed the stimulus component of policy; what they are now about to do is compensate for the error. In America’s “wrong” column, there is only one item: The stimulus measures put in place early in the Obama presidency were not sufficient, and economists who said so at the time should get more credit. This is precisely why the jobs numbers came out at the end of last week were disappointing.
THE NORTH vs. THE SOUTH
Until now Europe has lived by a Continent-wide economic policy fashioned by Germany, supported by France, the Netherlands, and other north European nations, and featuring austerity and structural reform as prescriptions for countries struggling with high sovereign debt, burst housing bubbles and wobbly banks, weak economies, and rising unemployment. Just for the record, unemployment across the European Union reached 10.9 percent last week—its highest since the euro was introduced in 1999. That is typical: It has been clear for ages that the policy mix in Europe was wrong, but no one would say the emperor had no clothes.
That is what is now changing. Ever since Hollande won the first round of polling three Sundays ago, senior officials across Europe have been lunging for the microphones to announce their belief in policies that offset austerity with demand-focused stimulus.
Late last week, Mario Draghi, president of the European Central Bank, asked Brussels to produce a 10-year plan for the euro with growth policies as its centerpiece. Part of what Draghi wants in the decade-long vision he proposes is what has been at issue since the Greek crisis nearly tipped over the E.U.’s common currency last autumn: more political integration so that economic and fiscal policies can be better managed throughout the E.U.
The next day Olli Rehn, the E.U.’s vice-president for economic affairs, echoed many of Draghi’s thoughts and added some of his own. The fiscal pact established last December can be applied flexibly, for instance. Spain, as a ready example among the desperadoes, can move its target for its deficit—it is now scheduled to drop to 3 percent of G.D.P. by next year—out a year to 2014. “The pact entails considerable scope for adjustment when it comes to application,” Rehn said in Brussels.