9
May

By Martin Wolf

The elections in France and Greece tell us that austerity fatigue has set in. This is not surprising. For many countries no plausible exit exists from depression, deflation and despair. If the currency union were a normal fixed exchange rate arrangement, it would collapse, as did the gold standard in the 1930s and the Bretton Woods system in the 1970s. The question is whether the fact that it is a monetary union will do more than delay that outcome. The last chance of bringing needed change rests on the shoulders of François Hollande, the newly elected president of France. Mr Hollande says his mission is to give Europe “a dimension of growth and prosperity”. So can he achieve this laudable aim?

Fiscal tightening does not improve outcomes in shrinking economies. Thus, austerity is merely begetting more austerity. According to the International Monetary Fund, the ratio of gross public debt to gross domestic product will rise, not fall, in every year from 2008 to 2013 in Ireland, Italy, Spain and Portugal. It will briefly fall in Greece, but only because of its debt restructuring.

The most frightening data are for unemployment (see chart). The proportion of young people between the ages of 15 and 25 who are now without a job is 51 per cent in Greece and Spain, 36 per cent in Portugal and Italy and 30 per cent in Ireland. France is in better shape, but even there the picture is dire, with one in five young people out of work. Is it plausible that people will put up with this indefinitely? No. Far more likely is a repetition of the protest votes we have seen in these elections. Nicolas Sarkozy was the eighth leader of a eurozone member country to have been swept from office in little over a year.

Economic prospects are poor. The IMF forecasts that the economy will shrink this year, in real terms, in Greece, Italy, Portugal and Spain and grow by just 0.5 per cent in Ireland. Growth is forecast, optimistically, at close to zero in the first four countries in 2013. This is politically perilous. The emergence of still more extremist parties and a rising sense of betrayal seems inevitable. It is also economically dangerous: how many of the brightest young people are now seeking to emigrate?

Something must change. Yet all routes seem blocked. Jens Weidmann, Bundesbank president, has argued in the Financial Times that monetary policy has reached, if not exceeded, its limits. The fiscal compact is designed to preclude discretionary fiscal policy. Anyway, in the absence of fiscal solidarity, member countries that face unsustainably high interest rates have no room for manoeuvre, while the currency union lacks a federal fiscal actor. Read more…

As published in www.ft.com on May 8, 2012.

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