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

SEN Coordinator + Teacher (SENCO)

£1 per day: Randstad Education Leeds: Job Purpose To work closely with the he...

Research Manager - Quantitative/Qualitative

£32000 - £42000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Senior Research Executive - Quantitative/Qualitative

£27000 - £31000 Per Annum Excellent Benefits: Clearwater People Solutions Ltd:...

ETL Developer / Consultant

£300 - £350 Per Day: Clearwater People Solutions Ltd: Our client is currently ...

Day In a Page

Read Next
Around 150 dogs have been rescued  

Charity isn't a thing of the past — we should be proud about how much we give

Alice Jones
 

Scottish referendum's swings and turnabouts: two years on the long road to poll position

John Curtice
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week