Plan A and the path taken by Hollande

Tuesday 8 May 2012

It is evident from election results in France and Greece that a wind of change is buffeting political stability in Europe.

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Being outside the eurozone will not prevent it swirling across the UK.

Francois Hollande was elected President of France on a domestic programme of boosting public spending, higher taxation on large companies and top earners and restoring a lower retirement age for some workers. The key question now, not only for France but for the rest of the EU, is whether his policies for growth will result in a shift of emphasis for the eurozone, where division is deepening between the proponents of austerity programmes of cuts in public spending and those who believe investment is required to stimulate growth.

With the election of Mr Hollande the two sides in this perpetual economic argument are now personified by the French President-elect and the German Chancellor, Angela Merkel. Yesterday the German Government was quick to announce it will not renegotiate Europe's fiscal compact on budget discipline and rejects measures to foster growth that would push up debt levels. Yet, wriggle room is required. Since both leaders at the centre of the euro project will want to keep it on course, they must strive for balance and embrace pragmatism.The prospect for growth will gain credibility if Mr Hollande can convince the Germans and other core members of the eurozone of the benefits of a growth pact that, crucially, will augment rather than replace the austerity pact. That pact has failed to produce the intended stability in the zone's peripheral countries. The inconclusive result of the national election in Greece, which gave neo-fascists their first parliamentary seats and put the hard left in second place overall, raises the question of how long that country can remain a member of the eurozone. Those who believe a Greek exit would be beneficial in the longer term both for Greece and the other eurozone members, however, must be prepared to weather the damage of a domino effect on other weak economies in Europe and on the banking system in the event of a default. The Greeks have delivered a verdict on austerity fatigue in most spectacular fashion. But the voters of Schleswig-Holstein also voiced discontent in a regional election in which Mrs Merkel's Christian Democrats recorded their worst result since 1950. She cannot afford to turn a deaf ear in an election year. Donor fatigue in northern Europe has the potential to become as forceful as austerity fatigue in the south. Similar tensions are being played out in the UK as George Osborne's austerity measures are failing to spark the private sector growth in which he has put so much faith, to the point where the economy is back in recession. The British people registered their lack of confidence in the Coalition Government's Plan A at the local elections last week. Faced with publicly voiced unrest from the right wing of his own party and growing support for Labour in the polls, David Cameron's response yesterday that his Government was not "just a bunch of accountants trying to turn around the British economy like it is a failing company" was negative and sounded hollow, in light of the double-dip recession. To people struggling as a result of rising inflation, frozen wages, high unemployment and cuts to child benefit, tax credits and public services, today's relaunch of the Coalition will look like political window dressing. Also, there seems little in the Queen's Speech of real economic substance to counteract that perception. Plan A patently is not working, economically for the country or politically for an embattled Coalition. Mr Hollande also has a difficult task ahead but his road map has more than one route.

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Plan A and the path taken by Hollande

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