In rural France on Sunday night, the newly-elected French president took to the stage and announced that he would lead the battle in Europe against austerity. On the other side of the continent, Greek voters were calling his bluff. By overwhelmingly opting for parties that want to either repudiate or renegotiate Greece’s bailout deal, they have handed Franois Hollande a painful dilemma. Will he stand with the Greek people against austerity? Or will he stand with the German government and the International Monetary Fund, in insisting that the Greek bailout cannot be renegotiated?
The choice Mr Hollande makes will be fateful, for France and Europe. Potentially, France’s new president could position himself as the head of Europe’s southern rebels. There is no doubt that the Spanish and Italian governments – even if nominally from different political families – have been cheering on the French socialist. They, like the Greeks, desperately want to see a challenge to German austerity orthodoxy.
Yet any French effort to isolate Germany within the EU would be a historic shift in postwar French foreign policy – which has been built around the idea that the "Franco-German couple” should run the EU together. Allying France with the European south would also damage France’s self-image, as one of the stronger economies in Europe. The perception of France in financial markets could also worsen. Most damaging of all, an open split between France and Germany would cause Europe-wide problems, opening up a seismic fault in the foundations of the EU and its single currency.
As a result, most analysts assume Mr Hollande will settle for a few face-saving gestures from Berlin, allowing him to say that he has changed the direction of the EU debate in favour of "growth”. Even before he was elected, experts in Berlin and Paris were sketching out the likely contours of an agreement.
A putative Hollande-Merkel deal would go something like this. Mr Hollande, as he has already hinted, would modify his demand to renegotiate the new EU fiscal pact – the deal that makes a move towards balanced budgets legally binding. Instead Germany would agree to a vaguely-worded new growth pact, which could sit alongside the fiscal pact. In similar vein, it would reject Mr Hollande’s demand for Eurobonds – the issuance of common EU debt. But it would probably agree to EU-backed "project bonds”, financing infrastructure projects. A boost to lending by the European Investment Bank would also be agreed. This would be a typical EU, Franco-German fudge that would allow all participants to retreat with honour – leaving the outside world largely unaffected and slightly baffled.
The new eruption of the Greek political volcano, however, greatly complicates this picture. The Greek problem is now so acute that it cannot be "fixed” through a few cleverly-drafted clauses, added to an EU treaty. It demands real, crunchy and dangerous decisions. Specifically, will Greece press ahead and make further billions of euros worth of budget cuts, within months, as demanded by its most recent bailout deal? If Greece refuses to do this, then the IMF has made clear that it will not authorise the release of the next tranche in aid to Greece. That, in turn, would mean that the Greek government simply ran out of money. Managed, if painful, cuts to pensions and wages would then be replaced by something much more chaotic and dangerous. The forced exit of Greece from the euro would also become much more likely.
The raw numbers from the Greek elections suggest that this stark choice might soon have to be confronted. The two mainstream, pro-bailout parties, New Democracy and Pasok, only garnered about one-third of votes. They will struggle to form a coalition government – and Greece may soon face more elections.
Moreover, even Antonis Samaras, the leader of New Democracy and still the likeliest next prime minister, would argue for changes to the Greek deal. Mr Samaras knows the fact that both centrist parties are now associated with a deeply unpopular austerity package, imposed by foreigners, is dangerous – it makes the nationalist and far-left extremists the only political gainers.
Specifically, Mr Samaras thinks that Greek businesses desperately need lower taxes. But he has received no encouragement in this argument from Angela Merkel – with whom he has a dreadful relationship. If he makes it as prime minister, Mr Samaras would position himself as a reasonable rebel, arguing against counterproductive German austerity policies. That makes him sound like a natural ally of Mr Hollande.
In reality, faced with a choice between supporting Greece and supporting Germany, the French are almost certain to go with the Germans. Yet such a choice would expose Mr Hollande’s anti-austerity rhetoric as vacuous. A few gestures towards "project bonds” will be as nothing, compared with the vision of France standing with the IMF and Germany to impose deep cuts on Greece, while the country’s economy shrinks and unemployment soars.
The combination of political chaos in Greece and an inflexible IMF suggests that Greece will hit a new crisis this summer. At this point, the EU will face a momentous choice. Does it step in with yet more aid for Greece, even as the IMF backs off? Or does it refuse to help Greece – accepting all the political and economic risks that come with such a choice? Faced with such a crisis, Mr Hollande’s vague and uplifting rhetoric about saving Europe from austerity is irrelevant.
Copyright The Financial Times Limited 2012.
Hollande's impossible French resistance
French voters have elected their anti-austerity candidate, but François Hollande will have little room to move between the wants of Germany and, more crucially, the needs of Greece.
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