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Austerity takes a hit in Europe

French voters throw out the incumbent president and Greeks give the heave-ho to the ruling parliamentary coalition. The results suggest a new consensus is emerging in Europe in favor of more economic stimulus.

May 08, 2012
  • President-elect of France Francois Hollande speaks to supporters as he leaves the Socialist Party headquarters on May 7 Paris. He promised to make small changes to France's austerity plans while doing more to promote economic growth.
President-elect of France Francois Hollande speaks to supporters as he… (Antoine Antoniol / Getty…)

Political upheaval in Europe reached a new apex over the weekend when French voters threw out their incumbent president and Greeks gave the heave-ho to the ruling parliamentary coalition. The results suggest that a new consensus is emerging in Europe in favor of more economic stimulus, but they also call into question the continent's ability to agree on a plan to keep its fiscal problems from spreading uncontrollably.

European leaders had agreed to a series of pacts that would rescue Greece and other defaulting countries in exchange for steep reductions in their red ink, while also requiring every country that relies on the euro to shrink their debts and curb deficit spending. Over the weekend, however, voters in Greece gave such large minorities in parliament to candidates from far-right and far-left parties who opposed the required spending cuts that the ruling coalition cannot continue to govern. And French voters dumped President Nicolas Sarkozy of the center-right UMP party, who'd been a key negotiator in the European rescue plans, in favor of Francois Hollande of the Socialist Party, who declared that "austerity can no longer be the only option."

The results are a sign of voters' lost patience with the entrenched leaders who presided over economies in decline, and signal an unwillingness to accept the painful choices they made. Yet neither country has much room to maneuver. Greece stands to lose its bailout if it doesn't make the promised budget cuts. And even as Hollande has questioned the emphasis on austerity, he has pledged to balanceFrance'sbudget within five years, a timetable similar to Sarkozy's. He would do so in part by imposing much higher tax rates on the wealthy.

Significantly, Hollande has said he would make only minor changes to the existing austerity plans. His goal, instead, is to persuade Europe to do more to promote growth as it brings its debt under control, by imposing a new tax on stock trades and having Europe's central bank and investment fund borrow and lend more money for stimulus projects. That combination is gaining support among European leaders, but it faces stiff resistance from German Chancellor Angela Merkel.

If the political turmoil in Europe derails the hard-won agreement over a rescue plan for Greece and other teetering economies, the result could be an even deeper recession that spreads across the continent, if not the total collapse of several countries' economies. Such a turn of events would inflict pain around the world. It may be a good idea to mitigate the harsh spending cuts with stronger economic growth; we've long argued that faster growth is crucial to solving the U.S. budget problems. But Europe can't afford to raise doubts about its determination to solve its fiscal problems.

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