Europe forced to balance growth and austerity

After winning the French presidential run-off on May 6, Socialist candidate Francois Hollande told his supporters: "Finally, austerity can no longer be the only option."

On the campaign trail, Hollande was not as blunt. He merely wanted to be "pro-growth". This "pro-growth" call has inspired a "pro-growth camp" in Europe, which includes Italy's Prime Minister Mario Monti.

However, everyone has been talking about growth in Europe since the spring EU summit focused on "unleashing growth and creating jobs", and since structural reforms, such as making labor laws more flexible, were achieved. So why the "pro-growth camp"?

Because Europeans are talking about different versions of growth. Vague and positive words such as "growth" are politicians' favorite euphemisms.

For the French, now it seems clear that their version of growth is "less austerity". For Britons, their growth means deregulation. For Germans, it means austerity plus hard work. At the spring EU summit, what the member states agreed was a growth based on both austerity and structural reforms.

No wonder Germans fret over the new French president, because he constitutes a challenge for Germany's austerity worship. Therefore, should any compromise between France and Germany be made, it will be on the basis of austerity measures.

The compromise will not be an easy one. It is a compromise between principle and reality as well.

Fiscal discipline — now read austerity — is deeply embedded in the euro area. It is a long-held and cherished principle.

The Stability and Growth Pact, agreed at a 1997 European Union summit, limits budget deficits to 3 percent of gross domestic product and government debt to 60 percent of GDP. The fiscal pact signed earlier this year, the one Hollande wants to renegotiate, can be regarded as an enhanced version.

The main reason for these strict fiscal criteria is Germany. Otherwise, Germany would never have considered giving up its strong deutsche mark in the first place, nor will it ever agree on eurobonds or a European fiscal union in the future, because that means it would have to pay for other "profligates".

The United States has a tradition of overspending. That is not the case for the Germanized Europe. Unlike the US dollar, the euro is not a hegemonic currency. Europeans do not believe they can print money in excess without suffering.

And here is the reality. Austerity measures conducted since 2010 have shocked the European economy and adversely affected society. A dozen countries fell into recession entering this year, including Spain, Belgium, Greece, Ireland, Italy, the Netherlands, Portugal, Slovenia, the UK, Denmark and the Czech Republic.

Government collapse or change in the Netherlands, France and Greece recently has been seen as a backlash against austerity. Austerity in its current form seems unsustainable.

The dilemma goes as follows. Markets worry about European government debts – they think the Europeans are living beyond their means, so the governments have to cut budgets rather than overspend. Once the governments cut, the economies lose blood. Once the economies lose blood, the governments have increasing difficulties paying debts or borrowing money. Europe has been in this dilemma since 2009.

Some say only structural reforms that bring long-term and sustainable growth can resolve this dilemma. That was why the EU held the "job and growth" summit mentioned earlier. But structural reforms take effect over time, not right away.

People like Hollande do not want to wait that long. He wants a faster solution. Therefore, he proposed growth through spending as well as through reforms. Growth through spending cannot resolve the dilemma, but might help him bide his time as far as the markets allow. Actually, the markets are getting less allergic to "anti-austerity" moves than they have been over the past two years, when the euro area was depicted as being on the brink of collapse.

Hollande has won sincere or reluctant followers. German Chancellor Angela Merkel has called for the bolstering of the European Investment Bank and urged the use of EU infrastructural funds to spur growth. Olli Rehn, European Commissioner for Economic and Monetary Policy, has advocated additional government spending for large-scale infrastructure projects, arguing that private-sector demand is not enough to create jobs.

Can Europe find the balance between austerity and growth? It depends on the result of the wrangling among Germany, France and the EU institutions. Should one doubt whether this will work, I will tell him that Europe has been muddling through like this for years.

(Huang Jing is Assistant Researcher at the European Study Institute of China Institutes of Contemporary International Relations)