A consensus is starting to emerge that something needs to budge in terms of the current orthodoxy on the economics of austerity. In short, Europe, starting with Germany, needs to review the terms of the fiscal compact, loosen monetary policy and accept that cuts alone are not leading us towards recovery. If we continue where we are, the danger is that political instability of the kind that we are already seeing in Greece will spread, in some cases propelling extremists to the fore.
The message from Europe's electorates in recent weeks has been consistent. Voters are saying they have had enough of bitter medicine that holds no prospect of recovery and no longer trust parties committed to Berlin-mandated austerity. In France this sentiment swept away Nicolas Sarkozy and brought in François Hollande. In Greece, frustration at the prospect of relentless decline is encouraging more disturbing political options, from the fascists of the Golden Dawn to the left-wing fantasists of Alexis Tsipras's Syriza party.
If Greece goes to the polls again, which looks likely following the failure of coalition talks, Syriza's hard-left, anti-austerity coalition is on course to win about 27 per cent of the vote, becoming the main political force in the country. Spain's economic outlook is almost as desperate. Madrid has no hope of meeting its budget deficit targets and must impose more cuts or be fined by the EU – a bewildering set of choices for a country where 23 per cent of people are out of work already. Meanwhile, Ireland's referendum on 31 May on the EU fiscal treaty will be another test of whether Europe's voters are ready to take more pain on the back of vague promises of gain in the very distant future.
Until now the messages from Brussels and Berlin have been the familiar ones: there is no alternative and the lady is not for turning, the lady being Chancellor Angela Merkel. But this may be changing. In the commission there is growing acceptance that the existing policy cannot be sustained if every government that adheres to it is rejected at the ballot box.
That leaves Germany as the great bulwark of fiscal orthodoxy, but even German voters are questioning Ms Merkel's rigidly debt-phobic economics. Fresh after losing the state of Schleswig-Holstein, she last night lost North-Rhine Westphalia, Germany's most populous state, which went to the polls yesterday.
No one in their right mind is arguing for the voodoo economics that Syriaz is proposing for Greece. Perhaps nothing can stop Greece from sliding into prolonged chaos, which will increase the likelihood of its exit from the euro. If that happens, Europe will have to deal with the shock. But in the meantime, what needs to emerge, especially after voters deliver another verdict in the French parliamentary elections in June, is recognition that things cannot go on as they are indefinitely.
The adjustment to lower public spending needs to be slowed while Germany must be persuaded to sign up to a growth compact, which means Germans living a little more extravagantly than they are used to, buying more from their European partners and taking the risk that this will lead to higher inflation. Anathema to many Germans, starting with Finance Minister Wolfgang Schäuble, who will ask why hard-working Germans should pay for others' mistakes. The answer must be that it is not in Germany's interest for large parts of the rest of Europe to go under. Germany's enviable prosperity is built on exports and on the euro but if its neighbours stagnate indefinitely, German companies and German living standards will suffer. Not a welcome message for Ms Merkel – but if her own voters turn against her, she may have to do a little turning of her own, in the end.Reuse content