Now what?

Hollande’s victory prompts fears that the eurozone’s fiscal compact is in danger

Written by The Indian Express | Published: May 8, 2012 3:22:04 am

Hollande’s victory prompts fears that the eurozone’s fiscal compact is in danger

Austerity is no longer destiny.” Those are the words with which France’s new Socialist president,Francois Hollande,greeted his nation. Europe and the world have been watching him warily,knowing that the eurozone’s future is poised on the France-Germany tandem,and Hollande’s economic orientation could undermine the “Merkozy” pact for structural reform and fiscal tightening. It doesn’t help that in his campaign,Hollande declared finance his greatest adversary. His promises include creating 60,000 teaching jobs,raising the minimum wage and imposing a 75 per cent tax on the highest earners. He has vowed to go to Berlin and renegotiate the deal,and shift the emphasis to economic growth instead.

Of course,the Merkozy pact is not the only responsible way forward. It has been argued that instead of a single standard of punishing austerity across the eurozone,there could be differentiated levels of fiscal tightening in various national economies: more in Greece,less in the Netherlands,for example. There is also a case for balancing structural reform with a boost to demand. However,the worry is that Hollande’s antipathy for austerity is not a genuine stress on growth,but a push towards public sector bloat,in service of some unsustainable Gallic ideal of the good life. France cannot afford that situation,with its soaring debt,undercapitalised banks and unemployment.

The upside is that whatever Hollande’s instincts,he is hemmed in by circumstances — he simply cannot repudiate the fiscal compact,even if he wants to recast it. Germany will continue to lead this dance,and investors will keep a hawk-eye on France’s credit-worthiness. Hollande’s test is only beginning — and we should judge him by what he does,not what he says.

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