The crisis is as much political as economic and although Europe has the resources to stave off further sovereign defaults and eurozone collapse, it remains to be seen whether the political will exists – warns former US ambassador to the EU
Francois Hollande's election victory Sunday over Nicolas Sarkozy and the losses by Greece's main political parties are only the latest examples of the growing anti-austerity backlash in Europe. The Dutch Prime Minister Mark Rutte resigned last month after the populist right-wing Freedom Party withdrew its support in opposition to a proposed €14.2bn austerity package, which included cuts to healthcare spending and increases in the retirement age. The Dutch government has been one of the few in Europe to maintain its AAA credit rating throughout the crisis, a sign that support for fiscal tightening is endangered even in the stronger economies.
In Romania, the government led by Prime Minister Mihai Razvan Ungureanu collapsed after only 78 days - making it the second Romanian government to fall over austerity measures this year. The collapse caused the Romanian leu to fall to a record low against the euro, even after Prime Minister Victor Ponta attempted to calm the markets by appointing a former central bank head as finance minister. Meanwhile, the Czech government narrowly survived a no-confidence vote driven by anti-austerity sentiment. And in Ireland, Sinn Fein is building public support based on opposition to Irish ratification of the fiscal compact.
For Europe-watchers everywhere, these developments are a reminder that the crisis is as much political as economic. Although Europe has the resources to stave off further sovereign defaults and the economic incentives to preserve the eurozone, it remains to be seen whether political imperatives in the pro-austerity countries can be reconciled with growing political opposition in parts of the continent. The adoption of a fiscal compact, moreover, means that the debate over austerity has now merged with the debate over Europe itself. In the Netherlands, the Eurosceptic Freedom Party argued against budget measures that impose "suffering for the sake of dictators in Brussels". In France, both Hollande and Sarkozy appeared at times to be running against Brussels. Certainly, Hollande's victory was based in large part on his commitment to renegotiate the European Union's fiscal compact.
Real questions remain, however, over whether Hollande and the emerging anti-austerity coalition will be able to translate campaign rhetoric against austerity into an alternative strategy that both satisfies creditors and puts Europe on a sustainable path to growth. So far, Hollande's suggestions of a "growth pact" are focused on more borrowing and spending at the European level rather than measures to spur structural reform. And his proposals to increase public spending in France will be difficult to reconcile with his commitment to eliminate deficit spending by 2017.
For American observers, one lesson is clear: it is critical that the United States addresses its own economic challenges before the markets force drastic action like the measures under debate in Europe. For one, deferring action until a crisis develops makes solutions harder mathematically. In Greece, citizens are facing a 77 per cent increase in the value added tax and a €1.1bn cut in healthcare benefits. In Italy, the total tax burden would increase 45 per cent. In Portugal, pension payments will be cut by €1.2bn this year. The US still has the opportunity, by acting quickly, to rein in spending and preserve entitlement programs with more modest measures.
Even more aggressive debt reduction measures in congress, for example, shield current retirees from benefit cuts and allow continued increases in health care expenses; though at a slower rate. Deferring action also raises the political costs. Unlike Germany, which undertook reform at a time of higher growth, most of Europe is attempting reforms just when governments have the least credibility to ask their voters to accept painful measures. Although the US recovery is still lacklustre, entitlement and budget reform will go down far easier with voters today than at a time of severe economic crisis. Kristen Silverberg is a former US ambassador to the European Union and a senior fellow with the German Marshall Fund of the United States think-tank, which first published this article as part of its Transatlantic Take series