Merkozy days are over as Greeks jolt EU's strategy

Tue, May 8, 2012, 01:00

ANALYSIS:With austerity rejected, a Greek default is again the key fear in Brussels. All this as the untested Hollande takes power, writes ARTHUR BEESLEY

IN THE third year of the debt crisis, the Greek and French elections herald a fresh bout of uncertainty in Europe.

Although incoming French president François Hollande will probably achieve a modest revision of the fiscal treaty, the febrile situation in Greece now threatens to turn very ugly indeed.

Whatever happens in these two dramas may have big implications for Ireland, where voters cast judgment on the treaty at the end of this month.

Hollande is man of the moment, but Europe’s gaze is firmly fixed on Athens. After a huge setback for the second bailout by the EU-International Monetary Fund, the big question now is whether the scheme can be salvaged at all.

As a result, Greece’s membership of the euro is in doubt again. This question is as knotty as ever, with a fragmented political landscape suggesting a new election may well be in store before any government is formed.

Europe still insists there can be no wavering from the settled rescue plan for the country, but a clear majority of Greeks voted for parties opposed to the austerity package tied to it. They include a neo-Nazi party, Golden Dawn, which took 7 per cent of the vote and is now poised to enter parliament.

The only two parties to back the EU-IMF programme – the conservative New Democracy and the socialist Pasok movement – saw their support evaporate. They won’t have the numbers to rule on their own, and the credibility of any coalition seeking to execute the troika plan would be in doubt anyway.

All of this presents a major headache to the European authorities. Any refusal to release rescue loans to Athens could trigger a fully fledged Greek default, precipitating the country’s exit from the euro and contagion in debt markets.

In any such eventuality, Ireland could not be presumed to be immune. The contrary would be true. This serves to underscore the seriousness of a referendum vote in which voters will decide whether the State has access to Europe’s permanent bailout fund.

With the untested Hollande in the Elysée Palace and Spain in deep trouble, the hunch must still be that Europe won’t let Greece go. Nevertheless, long faces in Brussels yesterday smacked of despair with the Greek political establishment and the increasing sense that a final reckoning may be fast approaching.

It remains to be seen where this leads ordinary Greeks. They have paid and will continue to pay the price for decades of reckless rule by Pasok and New Democracy. Although EU leaders have always said that the austerity path to rectitude is a lesser evil than an exit from the single currency, the message is not getting through.

Europe is urging Greek leaders to responsibly stay the course but the naysayers are in the ascendant and they appear to have the people with them.

The question naturally arises as to whether the rescue strategy is at all workable. At this reading, it does not appear so. Two years have passed since the original, unsuccessful bailout of Greece. Far from improving, the situation is worsening rapidly.

All of this puts Hollande’s push to renegotiate the treaty in the shade. German chancellor Angela Merkel was quick to rebut her new French partner yesterday, but that can be read as the opening gambit. Her staunch ally Nicolas Sarkozy has been deposed. She has no choice but to work with the new tenant. The Merkozy days are over.

In Brussels, the expectation remains that some form of an amendment will be conjured up to bind member states into a more thoroughgoing commitment to economic growth and structural reform.

This is politically messy, but feasible legally by stitching a protocol into the agreement. There is zero appetite, however, for any change to the existing treaty text and the rigorous fiscal commitments enshrined in it.

Taoiseach Enda Kenny and his Ministers would still be exposed to accusation from the No camp that they are asking the people to vote on a treaty which is set for alternation.

In anticipation of that, the Government has already rehearsed the argument that any growth-related add-on – let’s call it the Hollande protocol – would not have constitutional consequences for Ireland. It might also say that anything which serves to promote the growth agenda cannot be a bad thing.

This is where Hollande’s victory is symbolically resonant. Whether it proves equally so in the realm of actual political action is another matter.

For all Sarkozy’s dictatorial bombast and his pursuit of a new mandate for the European Central Bank, he still ended up toeing the Merkel line on practically everything. She always led, he always followed.

The incoming president promises otherwise, with growth his unwavering objective and austerity not the inevitability it is now.

In real terms, however, the margin for manoeuvre is limited. In the Brussels bureaucracy, those who advocate a relaxation of fiscal discipline in distressed countries are dismissed as “romanticists” blind to the cruelties of shadowy bond traders.

Still, Hollande’s ascent just happens to coincide with a wider reappraisal of Europe’s strategy in the crisis and new resolve to promote growth. Although this can be traced back to the arrival in the summit chamber of Italian technocrat leader Mario Monti, the ever-increasing likelihood that the socialists would oust Sarkozy has also served to focus thought.

The truism remains that it is not possible to create growth by political fiat or, for that matter, treaty clause.

Still, all signs point to a new EU growth initiative over the summer. This would include increased infrastructure lending by the European Investment Bank, increased structural funding and new moves to prise open closed sectors of the economy.

Yet this is notoriously difficult territory. There’s been no end of failed growth plans in the past, all of them accompanied by solemn promises and supposedly rigorous procedures to ensure ambitious targets were met. Dust gathered instead.

When it comes to the really difficult stuff – like facing down entrenched vested interests – governments tend to proceed their merry way down easy street.

In the coming weeks, Hollande will introduce himself to his EU counterparts. There will be little time for niceties.