Eurozone fears of stagnation grow as France and Italy suffer | World news | The Observer

Eurozone fears of stagnation grow as France and Italy suffer | World news | The Observer.


Francois Hollande

Francois Hollande and Paris’s mayor, Anne Hidalgo, at a ceremony on 25 August marking the 70th anniversary of liberation. Photograph: Joel Saget/AFP/Getty Images

François Hollande removed his government’s leading anti-German, anti-austerity leftwinger last week. By the following day the French president had already co-opted part of the message of the departed disloyal firebrand, Arnaud Montebourg.

As France’s ambassadors from around the world converged on Paris for their annual presidential pep talk, Hollande launched a fresh broadside against Berlin and Brussels. He called for an emergency eurozone summit to shift the troubled currency zone’s policies in a more expansionary direction. He demanded more leeway in spending cuts to get his budget deficit in line with the euro rulebook, although he has already twice been cut some slack by Brussels.

Europe is threatened by long, perhaps endless, stagnation if we do nothing,” he warned. “Because the recovery is too low, inflation is too low, the euro is too expensive.”

Hollande may be beleaguered, but he is far from isolated in that judgment. A week earlier the president had found a form of support in the unlikeliest of places, the European Central Bank in Frankfurt. Ordinarily a bastion of Teutonic monetary rigour and fiscal rectitude, the ECB is sounding the alarm at Europe’s maddening failure to dig itself out of its post-crisis hole.

In a speech in the US, Mario Draghi, the Italian head of the ECB, intimated a major policy shift towards fiscal stimulus, quantitative easing and asset purchases. It was time for Europe’s governments to stop cutting and start spending, he suggested, coupling his words with the usual nostrums about the imperative for structural reforms, particularly in France and Italy.

“Everyone’s concerned about France and Italy,” said a senior EU official. “The debate in the autumn will be difficult. We’re not back at the existential threat of the euro crisis that ended in 2012. But we risk slumping into low-to-minimal growth. The economic figures look a lot less promising than they did.”

More than two years into the Hollande presidency, the French economy stubbornly refuses to grow while joblessness rates continue to rise. Italy, with youth unemployment at a staggering 43%, is in its third recession in six years.

According to figures from the European commission last week, eurozone inflation was at 0.3%, well below the official ECB target of 2%, while business and consumer confidence fell by 1.6 points in the eurozone.

Over the last 12 months there has been an air of complacent self-congratulation among eurozone leaders at having weathered four stormy years of bailouts and bad banks, recession and soaring unemployment with the survival of the euro at stake.

Euro GDP Euro GDP by quarter, annualised As the leaders gathered this weekend in Brussels to squabble over top jobs and the shape of the new regime running the EU for the next five years, complacency gave way to a returned sense of gloom, a deepening realisation that Europe is entrenched in a demoralising era of deflation, stagnation, no growth, no recovery, and no jobs, especially for young people. The economic gloom descending in the wake of the debt and currency crisis is shifting some of the main lines of conflict in European politics, as shown by the drama in Paris over the last week.

Montebourg called austerity “absurd” and lambasted Berlin for imposing the spending straitjacket on everyone else. He had to go because of his disloyalty towards Hollande. But his criticisms of Angela Merkel, of austerity, of the hopelessness that German-led policies are breeding, resonated well beyond Paris.

The formation of Hollande’s more reformist team in Paris, the emergence of Matteo Renzi in Italy as a young populist centre-left agent of change, and Draghi’s apparent conversion to looser, more expansionary monetary and fiscal policies suggest that Merkel’s and Berlin’s domination of policymaking may be challenged more coherently. “It’s a new phase beginning,” said a second senior EU official. Merkel will face greater and more effective resistance across the eurozone “if they all play their parts cleverly “.

This leaves the German leader looking more isolated in Europe, though not necessarily weaker. “Her influence is still strong and resistance is growing,” said the official.

Arguments over austerity and growth have the makings of a battle or a bargain. An early sign of who has the upper hand will emerge over the next fortnight from the shape of the new European commission under its new chief and Britain’s bête noire, Jean-Claude Juncker.

The key post here is the economic and monetary affairs commissioner who polices the budgets of the member states and is the guardian of the German-prescribed rigour laid down in the euro rulebook, the stability and growth pact. Pierre Moscovici, Hollande’s former campaign manager and finance minister, is the French candidate and is laying claim to the portfolio.

Of all the top jobs being traded in Brussels over the next fortnight, however, this is the one exercising Merkel the most. She is determined to prevent it going to the French – and to stop it going to a socialist. She will compromise generously on some of the other plum posts to win this fight, say senior German government officials. This turns up the heat on Juncker, who enjoys substantial powers in deciding who gets what. In the formation of a new commission, national governments put forward their nominees. The commission chief then distributes the portfolios.

Juncker, like Merkel, is a Christian democrat, but on the leftish side of that broad church. He has said he is inclined to award the powerful economy portfolio to a social democrat. “It’s just not the case that you can divide the world into good and evil,” he told the Observer in May, “that Christian democrats are responsible for austerity and socialists for generous social policies. There’s good and bad on both sides.”

Whether a French or German-backed contender wins that post will show who has the upper hand in the fight between cutters and spenders, although both sides will look to cut a deal. “Who says Merkel favours a decade of no growth? We may see change coming with her tacit support. She’s not dogmatic,” said one of the senior officials.

If bargain prevails over battle, the deal would be to trade guarantees of changes to labour markets, pension systems and other structural reforms in return for a relaxation of austerity.

But it may be too little too late to make much difference.


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