France in a bind as austerity bites and ministers bark

France in a bind as austerity bites and ministers bark
French arts workers carrying fake coffins to a demonstration held at Marseille in June to protest against the government's austerity measures.

Traditionally, August is a month when politics comes to a halt in France, as the nation decamps to resorts and holiday homes for the annual summer break.

Not this year, however, for instead of devoting themselves to their suntans or sand castles, the French were treated to the highly unusual spectacle of a major Cabinet reshuffle, right in the middle of their sacred holiday season.

The reshuffle was made necessary by the eruption of a bitter dispute over the nation's economic direction. But French peculiarities aside, a similar debate is now taking place throughout Europe over how to prevent the continent from slipping into its third recession this decade.

The catalyst for the French reshuffle was the decision by Economy Minister Arnaud Montebourg, a prominent voice on the far-left of the governing Socialist Party, to break ranks with his colleagues over this issue. He openly criticised the government's plans to eliminate a massive €50 billion (S$82.2 billion) in public spending over the next three years in order to rein in the ballooning national debt and budget deficit.

Mr Montebourg claims that this fiscal straightjacket will further depress a French economy that is expected to register, at best, zero growth this year. Industrial output is 14 per cent down from its pre-crisis peak, while unemployment numbers rose last month to 3.4 million, or 10.1 per cent of the labour force.

"The priority must be exiting the crisis, and the dogmatic reduction of deficits should come second," said Mr Montebourg.

"The role of the economy minister is to confront the truth - even if it's cruel - and propose alternative solutions," he added.

The outburst was one too many for President Francois Hollande. Stressing that he would brook no further dissent, he named Mr Emmanuel Macron, 36, an investment banker known for being business-friendly, as the new economy minister this week.

"The president has no intention of changing course," said a terse government statement.

Even so, this is hardly the end of the economic debate in France. Next week, the new government will face a turbulent time in Parliament, where the ruling Socialists are deeply split.

"If we don't get a majority, it's over - we cannot continue," Prime Minister Manuel Valls warned legislators.

What could prove more awkward still is that even the painful expenditure cuts adopted by France might not be enough to stabilise its finances, for economic recovery has fizzled out throughout the euro zone.

In Italy, where a youthful and energetic Prime Minister Matteo Renzi came to power early this year after vowing to revive the nation's fortunes, little has been achieved. The economy shrank by 0.2 per cent in the second quarter, following a 0.1 per cent drop in the first quarter and an uninterrupted decline since 2011 - which means Italy is facing a rare, triple-dip recession.

And even the German economy, Europe's largest, suffered a nasty contraction of 0.2 per cent in the second quarter, with worse to follow. The highly respected Institute for Economic Research in Berlin warns that the economy will continue contracting as it experiences blowback effects from the sanctions imposed on Russia.

Many economists say Germany's obsession with imposing austerity in order to repay national debts is the chief reason that Europe now risks replicating Japan's 1990s depression trap.

The continent's leaders "are doing everything they can to stop recovery taking off, so they shouldn't be surprised if there is, in fact, no take-off", said Professor Paul De Grauwe at the London School of Economics, in comments to the British media.

At a meeting of central bankers last week, Mr Mario Draghi, the president of the European Central Bank (ECB), said he was ready to use "all the available instruments" needed to prevent a depression. His words were interpreted as a hint that the ECB could resort to "quantitative easing", a polite term for what amounts to printing money to buy financial assets, in the hope that such a move would kick-start the European economy.

That would be music to the ears of Mr Hollande who, as leader of Europe's second-largest economy, has often called on the ECB to help boost growth.

However, German Chancellor Angela Merkel, who possesses a crucial say in such matters, remains unpersuaded - largely because she fears another European credit crunch, as negative economic growth combines with very low inflation to push national debt burdens up again and put commercial banks under renewed pressure. Since the Germans know they would be asked to provide fresh bailout money in such an eventuality, they are not keen to endorse any extra ECB spending at this stage.

Mr Hollande might hope that his recent political troubles at home will persuade Dr Merkel to relent. Yet, barring any movement from the Germans, the only choice available to the French leader is to continue imposing austerity on his people, and to keep on firing ministers who oppose it.

Jonathan.eyal@gmail.com


This article was first published on August 30, 2014.
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