But Europe’s woes are starting to come back. Immediate attention is focused on troubled Spain, where still-ailing banks and a nose-diving economy have raised the prospects of the biggest bailout of the crisis to date.
Yet deepening economic downturns in Spain and Italy are also adding fuel to a growing backlash against the German-backed remedy for the crisis: massive cuts in government spending aimed at reducing deficits that ballooned during the credit bubble of the past decade. Fresh admissions by Spain and Italy that the cuts are driving their economies deeper into the ground and forcing them to slow the pace of austerity are unnerving investors, who sent borrowing costs for both nations surging back toward worrying levels Friday amid concern that they may be reneging on pledges to slash their deficits.
At the same time, just as in the United States, the question of austerity vs. growth has emerged as a major election-year debate in Europe, where myriad nations are years ahead of Washington in making cuts and feeling the pain as a result. Though fiscally conservative Germany — the euro zone’s powerhouse — sees austerity as the best and only solution to the crisis, a growing number of politicians and economists argue that it has been too much, too soon, and is only worsening the region’s prospects by deepening recessions in a host of European countries.
Those critics now include the Washington-based International Monetary Fund, which warned this past week that Spain and other European nations may be slashing budgets too quickly.
In a key test, the French go to the polls Sunday with the Socialist candidate, Francois Hollande, neck and neck with incumbent President Nicolas Sarkozy. Hollande — seen as the favorite in a likely second-round vote on May 6 — has vowed to renegotiate the European fiscal treaty struck in December and aimed at limiting government spending across the euro zone. He has also called for a new round of measures aimed at spurring growth.
Hollande’s platform appears to be resonating with French voters, even as it generates deep concern in Berlin, where Chancellor Angela Merkel has openly endorsed Sarkozy. Ahead of the vote, investors have sent France’s borrowing costs upward, a fact Sarkozy has quickly jumped on.
“If we start hiring civil servants, if we start spending again, it’s not a risk that interest rates will rise, it’s a certainty,” Sarkozy said this past week. “It would immediately set off a crisis of confidence."
Meanwhile, the May 6 elections in near-bankrupt Greece could see the rise of a fragile government that may find it hard to enact the deep cuts promised as part of its bailout deal with the European Union and IMF. With signs that smaller Greek parties opposed to austerity may win new seats in parliament, Athens could find itself in a new confrontation with its lenders, leaving it once again on the cusp of becoming the first country to exit the euro — a move that could unsettle global currency and bond markets.