E.U. faces growing opposition to austerity measures

March 1, 2012

European leaders gathered Thursday to sign a German-imposed treaty binding them to bring down deficits, but they faced swelling opposition to draconian austerity measures that have helped usher in recession and long unemployment lines.

The leaders, at a 27-nation European Union summit here, in effect were being called on to square an economic circle: reduce mountains of debt accumulated during years of overspending while at the same time stimulating stalled economies to re­ignite employment and assuage laid-off workers.

At Germany’s urging, the main strategy since the debt crisis erupted last summer has been austerity, seeking to shrink deficits at all costs to prevent the debts from spinning out of control. Should other nations join Greece in de facto bankruptcy, officials warned, the European Union and its common currency, the euro, would be threatened with collapse, triggering financial instability that could also infect the United States and Asia.

But a viewpoint has spread in recent weeks that austerity alone is not the answer and that it must be accompanied by reforms aimed at renewing growth. According to the latest E.U. figures, the 17 nations that use the euro face an average economic contraction of 0.3 percent in 2012 — and perhaps beyond — and are wrestling with a 10.7 percent unemployment rate.

The International Monetary Fund declared Tuesday that European policymakers should put more emphasis on growth despite the dangerous level of debt. The IMF’s new managing director, former French finance minister Christine Lagarde, urged such a shift on Germany in a speech Monday in Berlin but drew no promise of change.

Holding firm along with the Germans, the Dutch prime minister, Mark Rutte, told reporters here that European governments must stick to their debt-reduction pledges despite the rising complaints.

“The general remark I hear is that if times are tough, you don’t have to have austerity,” he said, according to the Associated Press. “Well, I don’t share that. Your government finances have to be up to scratch because it gives confidence to markets, to investors, to your own citizens to spend wisely. So we want to have our budget in order.”

Rejecting such caution, strikes and demonstrations protesting austerity measures and demanding a “social Europe” with fewer cutbacks broke out Wednesday, not only in hard-hit Greece but also in major cities of half a dozen European nations. In addition, 12 European leaders issued a pre-summit appeal for more attention to economic growth, which they said is the only way to move Europe out of its economic crisis.

“Growth is broken down, unemployment is rising, and citizens and businesses confront the most difficult situation in 12 years,” they said in an open letter to the E.U. Council president, Herman Van Rompuy, and the president of the European Commission, Jose Manuel Barroso.

Barroso, in a public response, agreed that more attention should be paid to getting European economies moving again. He outlined a series of reforms that he said would accomplish this goal in the long term but provided little hope for a quick return to growth while deficits were being pared and debts paid off.

“We need to do more to create the conditions for longer-term prosperity, to trigger a virtuous circle of reform, stability and sustainable growth,” he said.

Among those who signed the appeal were Prime Ministers David Cameron of Britain, Mario Monti of Italy and Mariano Rajoy of Spain, all considered fiscal conservatives. Significantly, however, France’s President Nicolas Sarkozy and German Chancellor Angela Merkel were not among the signatories.

Merkel, supported by Sarkozy, was the main force behind the deficit-reduction treaty to be signed in a formal ceremony on Friday by 25 of the 27 E.U. countries. It was designed to give Brussels the power to blow the whistle on countries that continue to run up excessive debt and, after a lengthy bureaucratic procedure, to impose a fine if a government fails to heed the warning.

The accord reflected Merkel’s long-standing insistence that European countries must get their financial houses in order because Germany is the largest contributor to the rescue plans that have bailed out Greece, Portugal and others from collapse. Despite their prosperity, she argued, German voters have wearied of paying for others’ legerdemain.

Merkel also insisted on delaying a euro-zone decision that had been scheduled for the sidelines of the summit to increase funding for a new long-term stability fund, the European Stability Mechanism, designed to guarantee that other debt-ridden governments will not end up like Greece. The idea of Merkel’s delay, officials said, was to make sure pressure remains high on Greece to live up to its austerity commitments under a separate $174 billion rescue package agreed upon last month.

The anti-deficit treaty, agreed to in December, was portrayed at the time as a last-ditch answer to the debt crisis and a milestone in European integration. Economists quickly pointed out, however, that it will take months, if not years, to produce a change in Europe’s finances even if it works perfectly as planned.

Doubts already have surfaced about whether this will be the case. Britain and the Czech Republic refused to sign the treaty from the outset, Britain because it objected to relinquishing sovereignty to Brussels bureaucrats and the Czech Republic because the government had doubts that it could get the pact ratified in parliament.

Ireland announced Tuesday that it will hold a referendum on whether to participate, raising fears that the treaty will be rejected by an electorate already griping about austerity measures imposed last year. Moreover, the front-running Socialist candidate in France’s presidential election, Francois Hollande, has vowed to renegotiate the treaty if he is elected, throwing France’s participation into doubt as well unless growth-producing measures are added.

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