European Politics and Economics: Partners for Growth or Natural Enemies?

Posted on April 30, 2012


April 26, 2012

European Politics and Economics: Partners for Growth or Natural Enemies?

Anxiety over Europe’s financial dilemma is at red alert once again. The origin of the cause this time is the European Union’s fiscal pact; an austerity agreement that has been force-fed to a number of the southern region countries of the EU, e.g. Greece, Spain & Italy. Germany’s insistence of sharply cutting government borrowing and spending asserted that it would restore stability and growth. It appears that it’s doing the opposite. The pact is proving to be so unpopular that it is emasculating and undermining governments. The tensions created by the European Union’s policies are impacting elections and causing governments to fall.

The Dutch government collapses, the major Dutch opposition parties repudiate austerity cuts needed to meet agreed EU budget targets, and Prime Minister Rutte will be tendering his cabinet’s resignation. Rutte must submit a new budget plan to the European Commission by April 30th, and as of now he doesn’t have enough backers in parliament to support his proposals. The Netherlands’ economy, historically one of the bastions in Europe, is not in good shape. The economy is slowing, unemployment is rising and the government debt is growing faster than it can afford. Up until now, the Netherlands had been a safe and stable harbor during the regional debt crisis, and its’ officials had reprimanded other countries that were struggling to get their house in order. So now there is no support or sympathy from the opposition parties. One of the leaders of the of the opposing parties was concise when he said he was fed up with demands from Brussels for budget cuts and funding for the European Stability Mechanism (ESM) which the euro zone will use for any future bailouts. “We don’t want to cut spending by billions of euros and at the same time transfer them to the horrible ESM emergency fund and the weak Greeks.” No one wants to make the hard decisions. There have been four Dutch cabinets in five years and nothing has been resolved. I guess it’s a Catch-22, damned if you do, damned if you don’t. If Holland can’t consent to these difficult cuts, how will the more troubled countries handle the discontent and unrest?

Spain’s new government has ratified some bold budget reforms, but not daring enough to fully comply with the pact’s demands. The IMF reports that Spain is facing a continuing recession and a gloomy slow recovery. There is little aid from export growth due to a fragile global economy, and a stronger euro. The unemployment rate is over 23 percent and Spain is facing rising borrowing costs while trying to maintain long term fiscal obedience. Spain needs to buy some time and low cost money to have the opportunity to maintain fiscal discipline while strengthening their economy. The question is, will the European Central Bank (ECB) present itself to be the lender of last resort to euro zone sovereign borrowers, keeping interest rates low, giving struggling countries an opening to rebuild their economies.

However, Europe’s backlash against austerity and forced sacrifices are gaining momentum. French President Sarkozy, an ally of German Chancellor Merkel, is caught in the crossfire. Merkel is the primary proponent of the austerity agenda. She remains resolute in her conviction saying Europe’s “credibility” depends on reducing deficits and debt. In the meantime, Sarkozy is fighting for his political life. He has lost the first round of his re-election campaign. Voters punished the President of France by making him the first incumbent in the 54 year history of the Fifth Republic to come in second in a presidential primary. His socialist opponent, Francois Hollande, is running on an anti-austerity platform, saying that budget austerity across Europe is “bringing desperation to people” and he will refocus on growth of the economy. While Merkel’s foremost strategy for economic health is debt reduction, she just recently supported the president of the ECB’s call to focus on spurring economic growth. German officials are refuting allegations that they fixated on only budget austerity to solve the debt crisis. The new European refrain is fiscal discipline and growth -NOW

The paradox for the Euro, the currency of the European Union 17 nations, is that when there is reassuring news regarding the sovereign debt crisis, the euro appreciates in value. This is the exact opposite of what the economically distressed euro zone countries need; a stronger currency to make their exports more expensive and less competitive.

For questions/information, contact  Joel Borshof
joel@imexfx.com

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