Hamish McRae: 'Austerity fatigue' is spreading from Europe's fringes to its very core. Can the centre hold?

Our Chief Economic Commentator on European solidarity under strain and March's borrowing figures

Share

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.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SAP Business Analyst - Data Migration, £75,000, Manchester

£60000 - £75000 per annum + competitive: Progressive Recruitment: Senior SAP B...

SAP Data Migration Consultant, circa £65,000, Manchester

£55000 - £75000 per annum: Progressive Recruitment: Senior SAP Data Migration ...

SAP Data Migration Consultant, circa £65,000, Manchester

£55000 - £75000 per annum: Progressive Recruitment: Senior SAP Data Migration ...

MS Dynamics NAV Developer

£45000 - £50000 per annum + Benefits: Progressive Recruitment: MS Dynamics NAV...

Day In a Page

Read Next
 

L’Unita: The venerable organ of Italian communism breathes its last

Peter Popham
Yvette Cooper speaking at the Labour Party conference last year  

The tricky choices for Yvette Cooper if Labour wins power

Nigel Morris
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star