Leading article: Only part of the way to resolving the euro crisis

All of Europe cannot be cut back at once without sucking the life out of the economy

Related Topics

Storm clouds are once again massing over the eurozone, and this time the problems are political. Europe's febrile bond markets have been calmer in recent months, thanks to the agreement of a "fiscal pact" requiring governments to limit their debts. But public backing for the painful deficit-reduction programmes needed to meet such targets is waning, taking support for mainstream political parties with it. And with elections in Greece and France this weekend – and in the Netherlands in a few months' time – the political consensus on how to tackle the crisis is in danger of unravelling. The consequences would be catastrophic.

It was Spain that hit the headlines last week. Not only is the Spanish economy back in recession, but one in four are out of work and, after another downgrade, the Government's credit rating is just three notches above junk status. Although bond yields are not yet unequivocally in the danger zone, they are steadily rising, and few expect Madrid to deliver its fiscal plan.

But Mariano Rajoy is not the only leader facing a restive electorate losing its appetite for austerity. In Italy, Mario Monti's popularity is also fading fast, and in the Netherlands – one of only a handful of EU countries with a triple-A credit rating – the minority government was this month toppled by a spat over cuts. Meanwhile, François Hollande, currently tipped to beat incumbent Nicolas Sarkozy to the French presidency, has pledged to re-negotiate the fiscal pact to promote growth as well as limit borrowing. And in Greece – where a fifth consecutive year of recession is set to slash another 5 per cent off the economy in 2012 – voters' disaffection is such that Sunday's elections may produce a coalition so fragmented it struggles to govern.

Neither is the scepticism restricted to the eurozone. Last week's evidence that Britain too has slipped back into recession has led to a chorus of unfavourable contrasts with the economic growth in the un-austere US. In fact, such comparisons are too simplistic, overlooking both the security offered by the dollar's status as the global reserve currency and the debt trouble Washington is storing up for the future. But the implications of the first real test of support for the coalition's economic strategy are no less significant for all that.

In economic terms, the austerity problem is easy to diagnose: reduced government spending threatens to create a downward spiral of cuts, recession, and more cuts. The solution is also easy to identify: private sector growth. But it is tricky to deliver while businesses lack confidence and bank lending remains sclerotic; and the traditional Keynesian remedy of turning on the government taps is simply not available. Any softening of deficit reduction plans will cause panic in the bond markets.

There is a glimmer of good news amid the gloom. Recent remarks from both Mario Draghi at the ECB and Herman van Rompuy, the head of the European Council, on the need for a co-ordinated growth policy suggest the message may, finally, be getting through to top European policymakers. But long-term reforms to boost the single market, while welcome, will not meet the immediate challenge.

There are other options. The German Chancellor is not wrong to stress fiscal co-ordination and strict controls on borrowing. But if all cut back at once it will suck the life out of the whole European economy, as we are already seeing. While those countries that are struggling to stay afloat have no option but to slash their spending, their more solvent counterparts – such as Germany and the Netherlands – should be upping their borrowing, boosting demand and helping pull the whole bloc out of recession, throwing a political lifeline to debt-reduction plans in the process. Until then, the storms in Europe are far from over.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Junior Web Designer - Client Liaison

£6 per hour: Recruitment Genius: This is an exciting opportunity to join a gro...

Recruitment Genius: Service Delivery Manager

Negotiable: Recruitment Genius: A Service Delivery Manager is required to join...

Recruitment Genius: Massage Therapist / Sports Therapist

£12000 - £24000 per annum: Recruitment Genius: A opportunity has arisen for a ...

Ashdown Group: Practice Accountant - Bournemouth - £38,000

£32000 - £38000 per annum: Ashdown Group: A successful accountancy practice in...

Day In a Page

Read Next

Errors & Omissions: A widow’s tale with an unexpected twist

John Rentoul

For all his faults, Russell Brand is utterly sincere, something politicians should emulate

Janet Street-Porter
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing