With Karolos Papoulias emerging as the
new Prime Minister of Greece, the nations of the Eurozone hold their
collective breaths to see what approach to the crisis the new
government will take. In some ways, Merkel and friends must be
breathing a deep sigh of relief at having dodged the bullet of a
coalition involving the ΚΚΕ (the Communist Party of Greece) who
wish to renounce austerity and and leave the Euro. After the election
dust has settled, a coalition has emerged between the parliament's
largest party, New Democracy, Pasok (the Socialist party) and the
Democratic Left. All three parties are broadly in favor of remaining
in the Euro and desiring a less radical renegotiation of the bailout.
However, the new government does seek some changes to the demands
placed on Greece, and this must worry Merkel and co.
Across Europe, austerity is looking
less attractive to politicians, as voters turn towards parties which
favor growth. In France, François Hollande defeated Nicolas Sarkozy
on a platform of taxing and spending. This is a sign of how much
things have changed in the two years since the last UK general
election, where austerity was taken as common sense. Since then,
European economies have seen little growth, and the prosperity that
has been created has not helped where it is needed most. As
government budget cuts force roll-backs across the services which are
available, most people feel worse off under austerity. Now the
Tory-led government talks about efficiency and promoting growth,
realising that if the situation does not improve then re-election
looks unlikely. As well as watching Greece, keen eyes are also
focused on France to see if Hollande's policies of tax-spend will
boost the economy faster than Merkel's austerity.
In the UK, boosting growth has support
on both side of the political divide
not the least because GDP must rise if tax revenue is to
increase enough to meet the government's deficit reduction targets.
Further stagnation in the economy will hinder growth in the long term
and cause lasting structural damage. Aside from the much talked about
'lost generation' of young people locked out of jobs and the housing
market through increased scarcity, social problems are becoming
exacerbated through a lack of prosperity – see last summer's London
riots for evidence of this. Faced with the prospect of the economy
tanking, the government's austerity programme now looks a lot less
like common sense and a lot more like an ideological commitment to
privatization and rolling back the state. I have blogged before about
the roots of the government's philosophical commitment to austerity.
If austerity is ever going to work, it
will have to deliver some growth soon. In the meantime, the people of
Greece are facing a fifth consecutive year of recession and world
greatly appreciate some growth. The austerity conditions imposed on
Greece are very harsh and surely smothering the green shoots of
recovery. However, the new government has little room to maneuver, as
they are reliant on the support of the rest of the Eurozone to manage
the country’s enormous debt. Papoulias needs growth and austerity,
but it is becoming evident that the two are mutually exclusive.
Greece will be watching both France and Germany to see which economy
grows the fastest. The divisions across Europe are summed up last
Friday's Euro 2012 match between Germany and Greece, a contest of the
prosperous against the impoverished. Germany's victory does not
silence the doubts about the merits of austerity.
The leaders of Europe are in need of
some answers to the question of austerity verses a bold dash for
growth, and are keen to see what happens in the countries which have
most openly embraced either stance. The new Greek government will
have to make some difficult economic choices and the continuing
existence of the Euro maybe rest on these decisions. One thing that
is certain – politicians will need to embrace either harsh
austerity or a strong push for growth soon, as the current stagnation
is unsustainable.
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