Europe, growth placed in the community schedule.

Punishment imparted upon recipes for austerity in France and Greece’s elections forecasts a new political cycle in Europe and ensures growth will regain its place in community summits. The triumph of the socialist candidate put a hold on the Prussian punishment imposed by Merkozy upon ‘Mediterranean squandering’: budget cut backs with no social sensitivity, extreme limitations on public expenditure and fiscal deficit, labor flexibility and even cut backs on retirement and pension funds.
According to the German economic-religious logic, extensively shared by Sarkozy, communitarian southern members –and some derailed Saxons – deserved a dose of suffering equal to the level of ‘squandering’ and fiscal irresponsibility that characterized their economic and politic activity throughout this past five years. Was all that distrust, unemployment, despair and even suicides necessary for peripheral Europe to understand it had to initiate a policy of adjustments and fiscal austerity? Was this a viable exit to the acute sovereign debt crisis that has been striking Europe for over three years? As we have been reiterating in several previous articles and as the French electorate decided on Sunday: no.

Sarkozy submitted to German logic and lost. He was defeated in a France parted between, on one hand, the continent’s most expensive State – the welfare State par excellence, which costs 56% of the GDP- and, on the other, the loss of its triple A, a record public debt which amounts to 89% of the GDP, 10% of unemployment, deficit over 5% and growth below 1%. At the same time, this expensive and severely threatened by the crisis of the economic space shared France, is the France Hollande inherits.

But he also inherits a France that in spite of its historic fear of identity loss, progressive migration and frontier dissolution, is with each passing day more conscious that its fate is linked to Europe’s, and fundamentally to the group of countries with which it shares its currency: the Euro. That is why, after seventeen years of Mitterand’s socialist victory, they said no more to conservative stagnation and Merkel’s increasing leadership over the Franco-German axis, deciding Europe’s second economy needed to change its position and message, not only towards its own country, but towards all of Europe.

When they voted, the French were conscious that they did not want for themselves the economic strangulation other neighbor economies were submitted to. It was not hard to notice the recession spilling over half Europe. With Spain exhibiting by the end of March two successive trimesters of negative growth, ten are the Euro Zone economies entering recession phase. Levels of unemployment in EU were also announced, which reached record figures since the integration process started -10.2% in average- and in some countries such as Spain, similar to those prevailing in the Great Depression: 24.5%.
Now, let us analyze what Hollande’s entrance through the Elysée gates means: indubitably a change of course politically, economically, financially, commercially and even culturally. But fundamentally it means a change of course for France and Europe in the definition of a successful exit strategy for the never-ending financial and fiscal crisis. The challenging part now is the characterization of that change.

Firstly, Hollande’s threats during his campaign regarding the revision of the Financial Stability Pact unless it is bound to a Growth Pact had already echoed in Brussels. Previous rumors regarding growth policies outlined by the European’s Commission Vice-president, Olli Rehn, assure the Stability and Growth Pact is no ‘demagogic fiction’ but that instead establishes the continent has made great efforts to contain the financial crisis nevertheless it now also needs collective efforts to gear growth, on top of measures that will enable to soften fiscal inflexibilities in the countries with greater problems, seldom implemented until now due to ideological dogmatisms, German pressures and France’s absenteeism. But France has returned and it has returned to strengthen the Stability and Growth Pact that, as Rehn says, does not deny the treaty that establishes austerity but instead complements it with two large measure packages. On one hand, an investment plan to stimulate growth that recollects ideas proposed by Hollande, and on the other, suggests more easiness in the implementation of austerity and fiscal balance policies: more time to reach the deficit goal set in the Austerity Pact and a change in income and fiscal savings policy, demanding more taxes to higher-income tax payers, less budget cuts and, fundamentally, preserving the most socially sensitive areas. A 90 billion Euros adjustment between 2012 and 2017, with 50 billion in tax raises and 40 billion in budget savings (against the 75 billion Sarkozy had proposed).

Merkel and the President of the European Central Bank, Mario Draghi, had already somehow dismissed Hollande’s victory and set their minds on the pact for growth proposed by the new French President in his campaign, leaving Sarkozy out of the picture. But they have conceived it, in their Prussian way, as an annex or follows to the Fiscal Treaty, which Germans and Brussels assert is untouchable since it is already in process of being ratified by the signatory countries’ parliaments. The German Chancellor has also indicated to lean towards strengthening the European Investment Bank’s capacity and using EU’s structural funds to support reforms that aim to growth. They are two out of the five measures Hollande sent to Brussels on May 7th. The rest are Eurobonds –‘tremendous heresy’ for Brussels- reopening debate on the ECB’s role, strengthening FTSE funds and assessing the application of fares on financial transactions.

Regarding domestic policy he has leaned towards giving greater fluidity to the labor market and improving State efficiency. But in the end, Hollande well knows –and examples given by Spain and Italy have confirmed it- France will not be able to grow unless the EU shifts towards Keynesianism, financing new structures and transitioning towards green energy. Berlin prefers structural reforms to set the foundations for an extremely long-term growth. Between these two perspectives the debate in the Franco-German axis will focus in the upcoming weeks. Its conclusions will determine the characteristics of the European crisis ‘exit strategy’ for the following months.

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