The EU debt crisis is more a crisis of how investors perceive debt, than a reflection on the actual debt levels of the countries themselves. It is time the markets took a more long-term view of the problem to ensure a sustainable path of action.
The pushback against austerity in the elections held yesterday in both France and Greece is hardly surprising. Passing unpopular measures such as higher taxes and spending cuts is never easy in a democracy. Moreover, the measures imposed have been both too harsh and rapid -- Greek suicides, recession and rising unemployment levels in the EU have made headlines throughout the crisis. The people have predictably punished their leaders, just as creditors installed technocrats in place of elected leaders in Italy and Greece last year.
While Hollande, France’s first socialist president-elect in 20 years, has famously proclaimed to be ‘pro-growth’ it remains to be seen how revolutionary his stance will really be. As the EU’s current economic strategy can hardly be called a great success, the discourse has already been visibly changing from that of austerity to growth. It is now widely agreed by most nations (including Germany) that the only sustainable solution to the crisis is to stimulate long-term growth and increase competitiveness. This is fairly obvious: countries cannot pay back their debts while they’re in recession or broke. What remains unclear is how this is to be done while cutting budget deficits.
Furthermore, changing leaders will not alter market demands. Austerity was imposed to calm bond markets, not to punish the public. The markets have predictably begun to protest the shift of dialogue from austerity to growth as the euro hit a four-month low on Monday. However, the current crisis has been caused by deep-rooted structural problems that austerity cannot solve. Some southern European countries have had unsustainable levels of government spending for decades. On the other hand, ironically enough, investor panic about an EU break-up could actually cause it to happen by pushing government bond yield spreads to dangerous levels. In fact, after pushing Greece’s public to the brink by demanding shockingly severe austerity measures the real possibility of an EU breakup has actually been created; election turmoil led to neo-Nazis and extremist parties entering the country’s politics for the first time in decades.
This current path that the EU has been forced on is clearly unsustainable; indebted countries cannot continue to be held to ransom by the markets as standards of living continue to drop and recession bites. Economies are meant to serve people, instead of the other way around. It is not simply a change of leaders and policies that the EU needs, but a re-think of creditors’ demands. In balancing austerity and growth, it is the time-frame of the deficit-cutting and how quickly creditors demand repayment that counts. Some creditors will ultimately have to accept losses no matter how harsh the conditions of austerity they impose, and take responsibility for their decision to lend to these countries. As long as the EU does not break up, the markets must recognize there is no ‘silver bullet’ to the crisis, and instead focus on making sure the indebted countries maintain fiscal discipline by making structural changes over the medium to long-term.