At its heart, the crisis in the eurozone is one of economics. At the start of Economic & Monetary Union (EMU) there was a great focus on the M, far less on the E. At the risk of oversimplifying things, the lack of economic focus is why things went wrong and why governments pretty much everywhere are trying to make amends. But the political price of this is becoming all too apparent and, whilst the centre of Europe is enacting reforms that strength central surveillance and powers (such as the fiscal compact), there are more signs that electorates and indeed politicians are pushing back. So where does this leave the eurozone’s recovery and reform efforts?
If the past two years have shown us anything, it’s not only that incumbents are vulnerable but also that honeymoons are tremendously short for newcomers. Once their feet are under the table, the budget and economy numbers are generally the same, if not worse, given the limited opportunity to worsen the budget numbers and blame the previous administration. Greece started the ball rolling back in 2009 with the Pasok-led government formed late in the year uncovering fairly major holes in the budget (and we know where that has taken the country). More recently, Spain’s incoming administration received the biggest majority for nearly 30 years, removing the incumbent socialists. This was meant to deliver the mandate required to push through the necessary austerity to appease markets.
In reality, since Rajoy took office in December, meaningful reduction has proven harder to deliver, the prime minister having to adjust the previous 2012 deficit forecast upwards, initially to 5.8% and subsequently settling on 5.3%. Furthermore, despite his majority and credentials, Spanish yields have traded decisively above those of Italy since early February, running as high as 50bp over Italian this month, up from 150bp below towards the end of last year. But we’ve also been reminded that Spain’s troubles have at their roots the intertwining of a property and banking crisis, with the sovereign issues being the by-product.
So, in light of recent events in both France and the Netherlands, where does this leave us? Is this the great austerity backlash? Not necessarily. For incumbents, most elections are lost rather than won. Witness the softening in rhetoric from France’s Hollande, who initially declared war on the world of finance but has since seemingly softened his tone as victory has appeared more likely (at least to him). After all, with more than half of French government debt held overseas, it’s not a war that France can afford to fight. Furthermore, France’s history is of a troubled yet symbiotic relationship with the world of finance. For the moment, we’re witnessing a reality check, especially for those new administrations which have realised that they cannot achieve that which is being asked of them. But ultimately the much-advocated solution to this crisis is closer political and fiscal integration. Recent events have shown that domestic political trends are working against that ideal. This makes the search for longer-term sustainable solutions that much more difficult.