Could democracy derail the euro?

Like a tidal wave, the crisis that has overwhelmed southern Europe smashed into the northern core last week.

By Louise Armitstead
9:01PM BST 28 Apr 2012

http://www.telegraph.co.uk/finance/financialcrisis/9233886/Could-democracy-derail-the-euro.html

The rock-solid “hard-line” leaders of France and the Netherlands were exposed as mere sandcastles, next in line to be swept away by the eurozone’s economic woes.

Eight days ago, the Dutch prime minister, Mark Rutte was deposed. A day later, France’s Nicolas Sarkozy, one half of the eurozone’s twin-engine, lost the first round of the presidential race. The other half, Germany’s iron chancellor, Angela Merkel, remained above water – but only as a dangerously isolated island.

The markets lurched in horror at the apparition of the deadly seventh wave of contagion. But the real shock was that this time the force wasn’t debt, but democracy.

Bond yields, borrowing costs and bail-outs, which have overwhelmed Greece, Ireland and Portugal, and that hover over Spain and Italy, too, were no real threat in the north last week. Despite their debts, the Netherlands and France have retained their low bond yields and AAA-ratings (France has only been downgraded by S&P). Germany’s economy is in rude health, relatively speaking.

Instead, the continent’s northern core has been hit by the eurozone’s other big crisis: the question of legitimacy.

For three years, Merkel and Sarkozy have imposed savage austerity with one overriding justification: to save the euro. As if in wartime, democracy has been sidelined and public opinion ignored under the assumption that the state – or superstate – has a higher cause.

With breathtaking audacity, Brussels installed its own technocrats in Greece and Italy to impose its policies in “sinner states”. Extreme measures were needed to keep the eurozone intact, they said – without ever properly asking if the electorate wanted the prize, let alone had the stomach for the cost of winning it.

The “legitimacy question” has been quieter than the rampaging debt farrago. Yet plenty reckon it poses the real danger to the eurozone – and is most likely to trigger its collapse. Over the next few weeks its pent-up energy will be unleashed in full – via a raft of ballot boxes across Europe.

Last week was just a warm-up. May 6 is a day of reckoning for Europe’s leaders as France votes for a new president, Greece for a new parliament, and Italy goes to the polls for local elections. German state elections follow. On May 31, Ireland is holding a referendum on Europe’s fiscal pact. In June, France has parliamentary elections. Then, on September 12, the Netherlands will go to the polls.

As last weekend has shown, the elections are fast becoming a vote on Europe’s growth and stability pact – the German-led plan to impose binding austerity rules on all eurozone countries. Merkel said the pact was “non-negotiable” and would “last forever”, but any national parliament that was ready to ratify the treaty is being roundly rejected.

François Hollande, the socialist front-runner to become France’s president, has vowed to scrap the pact. In a week’s time he could be tasked with co-driving the rescue mission with Merkel.

Meanwhile, Marine Le Pen, the self-styled Joan of Arc, put quitting the euro altogether at the centre of her campaign. Last weekend, she chalked up a record 18pc of the vote. Then, on the Left, is Jean-Luc Melenchon, an avowed anti-capitalist, describing financial markets as “parasitic”.

In the Netherlands, Geert Wilders withdrew support from the coalition, saying he refused to back the “diktats from Brussels”. He said: “We must be master of our own house.”

Yet the crisis is advancing mercilessly, particularly in Spain, which is too big to bail out, even by prime minister Mariano Rajoy’s admission.

So, will the eurozone’s austerity drive be swept away with its proponents? If so, who and what will replace them? If it’s not the fiscal pact, then what? If it’s not the eurozone, then what?

George Soros, the veteran investor, said the crisis was “undermining, destroying the European Union” in a way that is comparable to the collapse of the Soviet Union.

“Instability in the eurozone threatens the prosperity of the UK, the region and possibly the globe,” warned Andrew Tyrie, chairman of the Treasury select committee on Thursday.

No wonder Treasury insiders reckon the biggest threat to Britain’s fragile recovery is the French election.

On a recent trip to London, France’s presidential candidate Hollande declared: “I’m not dangerous.”

He meant that he didn’t plan to nationalise French industries in the manner of François Mitterrand, his early mentor and the last socialist to occupy the Elysée Palace. But his huge lead in the polls at the moment – at a level that has never before been overturned in a presidential race – is enough cause for alarm.

Hollande has promised, within days of the election, to reduce the retirement age for some workers to 60; boost family welfare payments by 25pc; freeze petrol prices; cap pay at state companies; and, crucially, to renegotiate Europe’s fiscal pact and block the treaty if he doesn’t get his way.

Hollande has never even met Merkel. And she’s already flouted diplomatic protocol and campaigned against him in favour of Sarkozy.

All week she repeated that the fiscal pact is not up for discussion. “The fiscal pact has been negotiated, it was signed by 25 government heads and is already ratified by Portugal and Greece. Parliaments all over Europe are about to adopt it,” she said in an interview on Friday. “It is not renegotiable.”

So, Germany and France seem to be on a collision course, since Hollande’s policies appear to take France away from the pact, not towards it. For France – which has the highest public-spending rate in the eurozone at 56pc of GDP – to reduce its deficit to the agreed 3pc of GDP by next year, Paris will need to impose €18bn (£14.6bn) of cuts, according to the International Monetary Fund (IMF).

But Hollande is planning a government spending spree, including hiring 60,000 teachers, which, by his own admission, will add €20bn to public spending over five years. His answer to spending gaps appears to be attacking business and the rich: he wants to impose a 75pc rate on the “grasping and arrogant” super-rich, and ratchet corporate taxes, too.

If the crisis has been tough with the tight-knit “Merkozy” in charge, what chance does it have under “Mellande”?

Little wonder that Germany’s Handelsblatt newspaper asked: “Is Europe Failing?”

Beyond the election bluster, Hollande isn’t as alarming as he sounds. Despite his revolutionary talk about the fiscal pact, he has pledged to reduce the deficit to 3pc of GDP by next year, as agreed, and balance the budget (for the first time since 1974) by 2017.

Instead, his reforms for the pact revolve around inserting clauses and measures to boost growth while slowing the cuts.

On this, Hollande has the sympathy of politicians and social campaigners who insist the human cost of the austerity plan is too much. There was almost palpable shock when, on April 4, Dimitris Christoulas, a 77-year-old pensioner, shot himself outside the Athens parliament, after saying he couldn’t face the prospect of “scrounging for food”.

A generation without jobs is growing up in Greece and Spain, where unemployment for the under-25s is more than 50pc and rising.

But Hollande would also have the support of other European leaders. Spain’s Mariano Rajoy has already negotiated a relaxation of his budgetary targets for 2012 to 5.3pc of GDP, after his officials told Brussels that their 5.8pc target would be “suicidal”.

Italy’s Mario Monti has repeatedly called for a greater focus on growth. Meanwhile, a mounting band of economists around the world reckon that German austerity is pushing the eurozone into deep recession – the spectre of which is beginning to rattle markets more than debt updates.

On Thursday night, S&P downgraded Spanish sovereign debt by two notches because of “budget trajectory [that] will likely deteriorate against a background of economic contraction”.

The rating agency said it expected Spain’s economy to contract by 1.5pc in 2012, rather than the 0.3pc it had forecast. It listed four reasons: declining incomes; private sector deleveraging; the government’s “front-loaded fiscal consolidation plan”; and the “uncertain outlook” for the rest of the eurozone. In other words: the austerity drive.

So, is the electorate right after all? Should the hardliners stand aside and allow a new set of leaders try a new set of policies? Or is Merkel right to say there is only one path to recovery? Over the next few weeks, Europe may be about to find out.


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