Adrian Hamilton: Austerity or growth? It doesn't have to be one or the other

World View: François Hollande's election provides an opportunity for a re-think

Everyone is getting themselves into a fearful tizzy over Greece. To hear some of the comment, including from our own Prime Minister never mind the ever-lugubrious Governor of the Bank of England, you'd think that the end of the world, or at very least the euro, was at hand.

No, it's not, not at any rate unless Europe's political leaders are determined to drive it that way. At 5 per cent of the eurozone's total economy, the rest of Europe could either pay up to save Greece or let it fall without disaster. At heart it's not a financial crisis but a political one.

The austerity deal imposed on Greece is no longer believed either within Greece or without. Instead of panicking over the results of the election called for next month, and inducing hysteria over the domino effect of a Greek exit from the euro, Europe's leaders should be asking a more immediate question: what do they want the politicians of any party in Greece to say to the electorate when they go to the polls that will make them believe that staying in Europe will give them a better future?

Telling them that it's either to keep with the austerity programme they've signed up to or they won't get any more money actually has the reverse effect of the intended. The more that politicians outside Greece talk of the disasters that an anti-austerity vote would bring, the more the average Greek feels Europe cannot afford to let them go.

Listen to the views recorded on the street and that's what most of the Greek public seems to believe. They want to stay in the euro but they don't want to continue down a vicious cycle of cuts. Raising the spectre of catastrophe only reinforces their view that it won't be allowed to happen. The problem is, of course, that the eurozone governments don't know themselves what they want. By now, given the contingency planning, there are many who think, for perfectly good economic reasons, that Greece should head for the exit door, just as there are those who, for more political reasons, feel it is essential that the eurozone remains intact.

It's no good telling the Greeks that they must keep to their punishing regime when the whole eurozone is wobbling under the demands of a new French President for a different approach.

A rethink is not before time. Austerity on its own isn't working. Ask virtually any European politician or leader and they would agree. It's near to being the new consensus. But just as they are terrified that letting the Greeks off the hook would spook the markets with uncontrollable consequences, so European leaders are frightened of easing back from the Fiscal Pact agreed only six months ago.

They shouldn't be. The markets may act as the final arbiter in a region of debt but it is a mistake to see them as the Inquisition. They want what we all want in a way: some stability in which to judge the future and some security to make sure they don't lose their money.

What is spooking them now is not a lessening of discipline so much as a collapse of political purpose. Many of them believe, with economists, that austerity in itself has become self-defeating. Look at the bond market reaction to François Hollande's election and the Greek election. They moved very little. A Greek exit had already been discounted. A new growth pact and a different Franco-German relationship they felt they could live with.

A new pact is what EU leaders should be bending their will to now. It's not nearly as hard as commentators would make out. The mechanisms are there in the European Investment Bank, in the development of Eurobonds and in seeking ways to closer economic rather than just fiscal union.

In that sense, the choice between deficit reduction and spending is a false one. Every politician seems frightened at the word "austerity" but it's a perfectly accurate one. We will all have to tighten our belts for some years. But that doesn't preclude higher borrowing for investment or a general agreement on slowing the pace of repayment.

David Cameron's demand yesterday that the eurozone gets its house in order or face collapse was just talking his own book. He's terrified that Hollande's election may give credence to the Opposition's criticisms that he has been cutting the UK budget too hard and too fast.

But, leaving aside its tone of a Victorian ticking off quarreling princelings in the dominions, it's the wrong thing to say at this time. Hollande's presidency provides an opportunity for a European-wide rethink on policy which Cameron should be eager to take part in. It offers Britain, just as much as its partners in Europe, a vision the better to sell fiscal propriety.

It might also provide the context in which the Greeks can determine their future. A referendum would still seem the best way to decide whether they want in or out of the euro. But at least that choice should be informed by a vision in which austerity would be just part of a bigger picture.