With the tedious inevitability of a long-lasting B-movie franchise, another episode of the Eurozone Crisis is shortly to be released, this time with some new lead characters.  Since we reported on the temporary resolution of the Eurozone crisis six months ago, things have proceeded fairly smoothly. The Germans have continued to impose rigorous financial efficiency on the rest of the zone, by requiring the vulnerable countries (notably Greece, Italy and Spain) to make swathing cuts in government expenditure with the intention of balancing their budgets. To an extent, this seems to have worked, as the interest rates on their debt have fallen. The citizens of these countries, however, are significantly disgruntled at the poverty these cuts are imposing.

There is a fairly compelling argument that balancing the books will not in itself bring the Eurozone out of recession, since some amount of government spending is necessary to stimulate the economy back into growth. The Germans of course, who face the bill for keeping the fragile economies going, are reluctant to countenance any increase in government spending, and of course don’t need to do this at home since their own manufacturing sector is doing very nicely.

Francois Hollande

Two events occurred last Sunday which will significantly threaten the fragile consensus over the German approach to Eurozone stabilisation. Francois Hollande, who was elected President of France last Sunday – the first Socialist President since Francois Mitterand left office in 1995 – believes in government stimulation of the economy.  ‘Austerity can no longer be the only option,’ he said. This means that the ‘Merkozy’ consensus which saw France and Germany together working to control government debt is now likely to be shattered, with France moving to a position challenging the Germans. Both sides recognise the danger of this and are keen to appear conciliatory.  Mrs Merkel, the German Chancellor, was the first leader to phone and congratulate Mr Hollande, who in turn will visit Germany for talks immediately after his investiture on 15th May.

Nevertheless, the argument seems to be swinging against the Germans as the Eurozone economy bumps along the bottom, and many people are realising that the German approach has not delivered recovery. The Eurozone may be about to change course. Hollande has a powerful ally – Mario Draghi, the president of the European Central Bank, who recently told the European Parliament ‘We have had a fiscal compact. Right now, what is in my mind is to have a growth compact.’

Greek voters

The second major event was the result of the Greek general election, which took place on the same day as the French presidential one. Many Greeks are extremely unhappy with the austerity imposed by last year’s EU-IMF bailout of the Greek economy, and disgruntled voters deserted the main political parties en masse. The protest vote was garnered by radical parties of the left and the right.  The second largest party, Syriza, firmly rejects the terms of the EU bailout, which means it cannot ally with the two other largest parties, who are pro-austerity, to form a government. There may have to have another election, which could well see Syriza improve its position.

This means that the government which eventually emerges is far more likely to reject the extreme measures which have been imposed on it in exchange for the bailout of its economy. This will lead either to the exit of Greece from the Euro – something which is already being discussed, albeit in reasonably guarded terms – or a renegotiation of the terms, which will not go down well in Germany, where voters are already unhappy at working long hours and retiring late in order to support the ‘lazy’ Greeks. Mrs Merkel faces a general election next year and after suffering recently in local elections she will be keen to avoid upsetting her voters. Germany has warned Greece that there will be no more money if it fails to keep to the agreed terms.

The ongoing uncertainty will ensure that the value of the Euro on international markets will remain depressed, and European mission workers will continue to find it hard to raise funds for their ministry.

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