Is austerity losing the battle in Europe?

In the past few days, Andrea Bonanni, Brussels correspondent for the Italian newspaper ‘La Repubblica’, published an article in which he announced that Angela Merkel and Germany had lost the long battle over austerity in Europe. Firstly, the last G20 Summit saw agreement on a range of measures intended to increase global GDP growth. Secondly, the ECB is preparing a bond-buying programme for early 2015. And thirdly, the European Commission has given additional time to Italy and France to fix their budgets in line with EU rules. Thus the Italian journalist has declared Renzi and Hollande winners, having enabled Europe to turn the page and prioritise reforms and economic growth rather than austerity.

However, Josef Janning, Senior Policy Fellow of the European Council of Foreign Relations (ECFR) in Berlin does not think that those advocating austerity are losing the political battle in Europe.

“The concept of fiscal sustainability is seen in Berlin and other northern capitals not as an end in itself, but as a means to enable more action by government to promote a competitive economy and to open up opportunities for growth”.

French weekly newspaper ‘Courrier International’ has also reported on Bonanni’s article, illustrating it with a cartoon where Angela Merkel appears riding a pig (an allusion to the “PIIGS” acronym). According to the ECFR analyst, European media outlets are too critical of the German Chancellor and too little attention is being paid to the effects a departure from the fiscal stability schemes would have inside the Eurozone.

“It would kill the euro before the chance of building better governance in member states could be seized,” warns Janning.

As the article from ‘La Repubblica’ states, Merkel continues to force countries like Italy or France to implement additional efforts of tax consolidation in order to safeguard her position with the German electorate.

“I see that as an exaggeration which seems to serve domestic purposes,” says Josef Janning. “Merkel does not force countries; she reiterates the commitments EU countries have signed in the treaties and eurozone rules. Of course, the German electorate appreciates this position”.

Over the last number of weeks, Bundesbank president Jens Weidmann is also being portrayed as the real instigator of inflexible and orthodox austerity ideas spread all over Europe. On this, Janning believes that

“the mainstream economists in Germany have indeed been on the orthodox side of the argument”, which has had echoes in the Bundesbank. In addition, he does not believe that inflexibility is a criterion of austerity as such, but “the product of mistrust in compliance with treaty rules” and recalls that “Merkel herself has stated in the German parliament that she would even accept eurobonds, if there was assured compliance with the rules.”

Meanwhile, Jens Weidmann continues to voice his strong opposition to any programme of sovereign-bond purchases by the ECB. In an interview with three newspapers from the largest EU countries (El País, La Repubblica and Le Figaro), the Bundesbank president stated that “at least for now, monetary policy must not react” against low inflation in the euro area (0.3% in November), considering that low inflation rates are due to the fall of energy prices. Besides, he repeated that France should increase its competitiveness, reduce its government spending ratio and meet the targets agreed with the European Commission.

“It would be very unfortunate if the impression were to arise that the rules were ultimately negotiable and consolidation could be pushed further and further back by national governments,” stressed Jens Weidmann.