We are used to worrying about the fringe of Europe, but now "austerity fatigue" seems to be striking the core. The Netherlands retains its AAA credit rating, but its government has just fallen because it could not agree on its budget programme. And France, recently downgraded by Standard & Poor's, has had an election with a massive protest vote and the prospect of a new president who has promised to fight the financial markets.
Both developments must be seen in perspective. The Netherlands will get a new government and has a strong long-term record of sound fiscal management; and French presidents, like other politicians, do different things in office than they promised to do when electioneering. But what I find interesting about both countries is that they are seeing a push-back against austerity before it has really been imposed, or at least while it is still in the early stages. So re-establishing fiscal discipline is no longer just a political problem for the fringe; it has moved closer to the core. Only Germany remains committed to reaching fiscal balance and also has the political support to achieve it.
You can see the result in the markets. The interest rate on Germany's 10-year bonds is currently under 1.7 per cent; on the equivalent Dutch debt, it is 2.3 per cent; and on French debt, just over 3 per cent. (For the UK it's around 2.1 per cent.) So virtue, or at least perceived virtue, is already bringing a massive reward to German citizens. Despite similar debt levels to the Netherlands and France, they can borrow much more cheaply – in fact, more cheaply than any other country in the world, including the US.
This benefits German companies, mortgage holders, banks and other borrowers too. Not only would people prefer to lend to the German government. They would prefer to lend German euros, under contracts issued under German law, rather than, say, French euros in contracts issued under French law.
That is great for Germany, but worrying for the rest of Europe. Last weekend the International Monetary Fund added a further $430bn to its rescue fund, the idea being to build a bigger firewall between the weak fringe European countries and the strong core ones. If Spain needs a bailout, which many think is likely, then it might be possible to stop people thinking that Italy will need one too. That would have huge implications as Italy is the third largest sovereign borrower in the world, behind the US and Japan. But talk of firewalls becomes irrelevant if the fire has already spread. If the markets really doubt France's ability to service its debt, a currency union between Germany and France becomes unsustainable. The euro could not be saved even by jettisoning its fringe members, including Italy.
We are still a long way from that. The gap between French and German bond yields could narrow again. But to do so, France has to persuade foreigners to continue to regard the premium between the two as making it worthwhile taking the risk. It will not be the French making that decision: more than half its national debt is held by foreigners.
There is, however, a more pressing problem: the future of the Treaty on Stability, Coordination and Governance. It was signed by all members of the EU, apart from ourselves and the Czech Republic, on 2 March. If trying to achieve its aims can bring down the Dutch government, one of the beacons of probity, what chance do less austere regimes have? And if it is either not ratified by all signatories or simply ignored as was its predecessor, the Stability and Growth Pact, then what stands behind the euro? One should never underestimate the political will behind the euro project, but if voters won't support that political will, things get tricky indeed.
March figures for borrowing
These end-March numbers are not the last word on borrowing for the financial year because there are always revisions, but we seem to have hit the revised deficit target of £126bn. That is down from £137bn for the previous year, so this is decent progress, given disappointing growth. Actually growth may turn out to be rather higher than current estimates, and these figures reflect that reality.
But they are not great and the last couple of months have been particularly disappointing. Tax receipts have been soft: total tax was only 1.4 per cent up on March last year and in February was actually down by 2.7 per cent. These receipts are partly the reaction to the 50p top tax rate, which encouraged people to cut their earnings, and therefore reduced revenues. But it can't only be that, and they bode ill for the new financial year. They are also an uncomfortable backcloth to the first quarter GDP numbers published today. It is true these estimates are extremely unreliable, but the deficit figures are real numbers and I am afraid rather worrying ones.