If there were any lingering doubts about the seriousness of the crisis hanging over the future of the euro – and potentially of the European Union itself – the shock announcement of the dissolution of the French government should remove them.
The tensions within the French socialist government have been building up for months as the economy has threatened to “double dip”. But it has been public criticism by the French economy minister, Arnaud Montebourg, of Paris’s compliance with eurozone austerity which has led President Hollande to call for the formation of a new government.
The irony is that some of the fears expressed by Montebourg about the French economy drifting into deflation have also been expressed by the president of the European Central Bank (ECB), Mario Draghi, in an important but little-noticed speech in the United States on Friday evening. Draghi did not disguise his growing concern at the stagnation of the eurozone economy and the failure to stimulate demand by countries in a position to do so. This is fairly obvious code for Germany.
It must be assumed that – under President Hollande’s instructions – the French prime minister, Manuel Valls, will duly produce a new administration without any troubling dissenters. But it would be very surprising if the same debate triggered by Montebourg does not return to haunt French policymakers before too long. What is new and potentially very alarming, however, is the prospect of time rapidly running out for the French government – and, indeed, the eurozone as a whole – to avert disaster.
Draghi and the ECB clearly want to take rapid action to further ease monetary policy, possibly including large-scale purchases of public and private debt. But the timetable for delivering this is not entirely in the ECB’s hands, and it is still possible that the Berlin government – under pressure from the Bundesbank – will drag its feet. Nor is there much enthusiasm in Berlin to take fiscal measures to stimulate demand across the eurozone.
The danger is that if the eurozone slides further into outright deflation it will become even more difficult to reverse the economic tide. Beneath the surface, however, realisation may be dawning about the scale of action which must now be taken, lest the choice become one of saving the euro or saving the EU itself. Within the Merkel coalition, pressure is building up for a change of economic direction to avert not just an economic but a political catastrophe for European integration.
This putative “new direction” should not only include emergency monetary easing by the ECB but also demand stimulus by governments, if necessary accompanied by the temporary part-suspension of some of the eurozone rules on inflation and government deficits. But the maximum deployment of the collective EU capacity to fund a kind of New Deal, spearheaded by a massive increase in investment in economic, energy, transport, environment and social infrastructure, is also essential.
It is a direction which President Hollande himself would be happy to support providing he can maintain a facade of unchallenged government authority and continuity of strategy in Paris. It will be a difficult trick for him to carry off. The Italian government led by Matteo Renzi is also aware that its own political honeymoon is drawing to a close, and it is conducting a barely disguised campaign for a change of eurozone strategy.
When push comes to shove inside the conclaves of eurozone ministerial meetings, there may well be a clear majority for new policies and urgent delivery of them. Even in Finland, traditionally a hardline austerity ally of Germany, new voices are being heard warning of the economic rocks looming ahead.
Will Merkel bow to this pressure for a new eurozone initiative? It would be surprising if she does not. More than any other EU government, Germany has an all-too-vivid sense of what could follow the disintegration of the euro. The very survival of European integration could be at stake. Events in Ukraine and elsewhere provide a sobering reminder of the price which a weakened and disunited Europe could pay for an economic miscalculation now.