Hamish McRae: Changes, yes, but no sign of an end to the euro's woes

This summer's story will be that the euro country economies continue to diverge
  • @TheIndyBusiness

The only certainty is uncertainty. Europe's economic policies will shift following the elections of the past weekend but not necessarily in the way that people expect. We saw that austerity is unpopular with voters but we knew that already. We saw incumbents being punished but that, too, was wholly to be expected. But we have not much of a feeling for what happens next – except perhaps that those of us who go to the Continent this summer might get a few more euros for our pounds.

Still. Some things have become clearer over the past few days. One is that the fiscal compact – that was the thing we refused to join – will have to be modified as it will not be ratified in its present form. There will have to be some kind of growth element tacked onto it. Quite how this will be done is wide open and will be a subject of intense negotiation between Germany and France once the French cabinet is in place. The changes may be largely cosmetic, involving some extra lending on infrastructural projects supposedly to boost growth, but cosmetics matter.

A second thing will be that France will bring in a new economic programme. The widespread expectation is that this will be a modified version of François Hollande's electoral platform, including some high-profile elements, such as higher taxes on high-earners, but not materially changing the big fiscal numbers. Remember, his plan is still to cut the deficit, but just to do it a bit slower than previously projected. One thing that may go will be the cut in retirement age to 60, particularly, as Bloomberg notes, as the average age of his top 10 advisers is higher than that. Among the main contenders for ministerial posts are Laurent Fabius, aged 65, Elisabeth Guigou, also 65, Jean-Marc Ayrault, 62, and Martine Aubry, 61.

A third thing becoming clearer is that Greece will not be able to sustain the discipline required to stay in the eurozone. It is impossible to see the sequence of events or the timing, but an exit does seem inevitable. Capital Economics thinks this could happen before the end of this year.

Finally, and unrelated to all this political stuff, it has become pretty much inevitable that Spain will need some sort of bailout, as the weakness of its banking system loads more debt onto the central government. The need to rescue Bankia, an amalgam of regional banks which were brought together to create the country's third-largest bank, seems likely to be the first stage in a string of such events, rather along the lines of what happened in Ireland.

So that is where we are. What happens next? I think the big story through the summer will be that the fortunes of the different members of the eurozone will continue to diverge, with the core not doing badly at all but the fringe continuing to suffer. The latest data from Germany is not bad, thanks to a surge in industrial production in March.

There are other positive global influences, especially lower oil prices, which greatly benefit a region that imports most of its energy. And, a point always worth making, the global recovery seems secure – it is just our bit that is wobbly. So it is perfectly plausible that the European economy sees only a shallow recession, with stronger parts such as Germany escaping recession altogether.

Paradoxically, this may prolong the uncertainty. A Europe that is still just about growing is strong enough to hold the eurozone together for some while yet. The new French government will be just as committed to the euro as its predecessor, not least because Martine Aubry, who is expected to be prime minister, is the daughter of Jacques Delors, often dubbed the "father of the euro".

Bring on the entrepreneurs

The clutch of business leaders ousted by shareholders is a welcome, perhaps belated, case of the owners of publicly quoted businesses doing their jobs. It is also another example of society correcting an excess. But it may have a further beneficial effect, too, in encouraging entrepreneurship.

After all, anyone seeking a career in business faces a choice: go into the hierarchy of a big corporation and try to climb the ladder; or start up on your own. Do the former, and, if successful, after many years you become chief executive – only to be pilloried as a fat cat. Do the latter, and, if it works, you are celebrated as an entrepreneur and a job creator – and invited to Downing Street to advise on policy.

A generation ago, it was the other way around. The leaders of the big companies, many of whom were second-rate, got knighthoods, while anyone who set up their own business was dismissed as petit-bourgeois. So the question is whether this radical shift in society's social priorities – elevating entrepreneurs and depressing the commercial bureaucrats – will deliver a better-performing economy. I think it might.