Not the Election Europe was Waiting For

A little econ-blogging for the morning. 

In Greece on Sunday, voters (barely) proclaimed their allegiance to the European Monetary Union, choosing a painful path forward over a potentially disastrous exit. On Monday, the markets appeared to desire the same pledge from the rest of the Euro zone’s political leadership, with slumping indicators offering yet another critique of political solutions to economic problems.

Greece’s election is likely to result in a ideologically-mixed coalition government that endorses Greece’s agreements with the European Central Bank and the International Monetary Fund to pursue austerity policies and structural reforms in exchange for low-interest loans to pay off their creditors and keep their public sector afloat.

But Greece is going through a crushing depression, with 21 percent unemployment and a 7 percent contraction in GDP over the past year. The Greek government has promised its rescuers that it will respond to this depression by cutting 150,000 government jobs in the next three years, cutting the minimum wage 20 percent, and cutting spending this year by at least 3 billion more Euros.

The kind of misery that entails isn’t politically tenable, suggesting that Nouriel Roubini’s pessimism is rightly placed: This government won’t last. The markets, initially bolstered by the news of the election, soon responded with slumps and pressure on Italian and Spanish bonds in a preview of the next pressure points in the European financial crisis. Political confidence is one thing, but investors don’t see a solution to Europe’s growth problem.

Meanwhile, the most important European election last weekend may have been the one in France, where President Francois Hollande’s socialists saw major gains in parliament. That gives Hollande a firm domestic platform to push his regional growth plan, which calls for $151 billion in stimulus to fight shrinking economic growth across Europe.

This is in contrast to the latest plan proposed by the ECB and other Euro zone leaders that focuses on further spending cuts and tax increases alongside structural reforms in labor markets and new bank regulations. While much of that program will improve economic conditions over time, it falls short of immediately alleviating a disintegrating situation, nor does include proposals for Euro bonds, perhaps the clearest way to affect the fiscal transfers that make monetary unions functional, or a hint of easier monetary policy that could provide a direct panacea to the continent’s economic woes. 

Of course, the kind of tighter fiscal integration and wealth transfers implied by those policies don’t make them very popular in Germany, the Euro zone’s strongest economy, and that’s why leading policymakers there and in other non-periphery countries have been reluctant to adopt them. After years of stop-gap solutions to the Euro crisis, it remains unclear whether any of the union’s leading members have the will to preserve it.

Now Greece has affirmed its commitment to the Euro, but for the economic union to survive, Germany and other leaders will need to do the same before economic turbulence will subside.

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