Sunday, May 06, 2012
Goodbye Sarkozy and the Fiskalunion
The defeat of Sarkozy and the change of political colours in Greece will lead to major challenges for the European Union.
What really is going on here is not simply left-right politics and the defeat of the shock doctrine of austerity. It is a statement that the people need to be involved in critical decisions which affect their future. The grandstanding of Merkel and Sarkozy and their arrogance (remember the Merkozy reaction to the idea of a Greek referendum) distance the euro-elites from the people they represent. The fiskalunion, which is a recipe for serious conflict in Europe, will lead to further dislocations and distances between the people and those who represent them.
As President Hollande of France will discover, unravelling the consequences of the fiskalunion agreement will be difficult. Merkel will want to stick to her guns and the markets will react negatively to a tax and spend agenda. France has already been downgraded and could see its credit rating fall further - it has to borrow casts amount so that it can sustain its debt payments during the coming year.
Seeking to change the banking regime in Europe is critical - there are still many vulnerable banks. Hollande wants a different role for the European Bank and wants the stability fund massively increased. Few amongst the technocrats in Europe will support this agenda, though they are signalling a willingness to add growth to their thinking about what needs to happen.
But how can austerity be matched with growth ? It can't. The real solution here is to encourage several countries to leave the Euro. Spain, Portugal, Greece, Italy would all be better able to manage their economic future if they could pull more of the levers of their own economies. The fight to save the Euro is at the heart of this crisis. This is not something anyone is willing to talk about.
Austerity is the wrong strategy. What is needed is a combination of fiscal independence, tight fiscal management of government spending, focused investments in infrastructure, innovation, a systematic attempt to lower energy costs and a relentless focus on job growth.
This will be an interesting year for the EU. We can expect further tensions and conflicts. Watch this space.
(Read more about these issues in my book Rethinking the Future available on Kindle and at lulu.com)