VLADIMIR PUTIN’S seizure of Crimea and destabilization of Ukraine have added geopolitics to a list of Europe’s woes that had previously been headed by economics. In fact, if not for Mr. Putin’s land grab, the big story out of Europe might be its surprising economic comeback.
That’s a relative judgment, to be sure; Europe has come back only in comparison to the disaster it faced two years ago, or to the even larger collapse that many forecast. Still, after many long months of negative growth and high unemployment, heavily indebted governments such as those of Spain and Italy can now access credit markets at rates not much higher than Germany, Europe’s economic powerhouse. Even Greece sold five-year bonds at manageable interest rates on Thursday; the European Commission predicts the Greek economy to grow in 2014 for the first time in half a decade, albeit only by 0.6 percent.
These results are a tribute not only to these countries’ willingness to impose wrenching austerity. They also bespeak an implicit bailout from the European Central Bank, whose president, Mario Draghi, persuaded would-be investors in official debt that the ECB would do “whatever it takes” to shore up the currency, the euro, in which that debt is denominated. But the progress hardly means that the region’s problems are well and truly behind it. That could only be said once it resumes sustainable economic growth, which, in turn, hinges on the resumption of growth in the second and third largest economies after Germany: France and Italy.
France and Italy are plagued not only by insufficient demand, which austerity worsens, but also by overregulation and job-destroying tax systems. Entrenched interest groups have fended off structural reform for years. Fortunately new prime ministers, Matteo Renzi in Italy and Manuel Valls of France (the latter an appointee of President François Hollande), are proposing fiscal policies that actually address the high cost of doing private-sector business in their respective countries. Since these policies include tax cuts, however, they also might increase French and Italian borrowing in the short term, above the levels permitted by the European Union.
The powers that be within the European Union — German Chancellor Angela Merkel and Mr. Draghi — would be wise to grant Mr. Valls and Mr. Renzi the fiscal wiggle room they need. It’s one thing to borrow for current consumption, which is what France and Italy have done, in spades, until now. It’s quite another to borrow for purposes of enhancing an economy’s growth capacity. To the extent that France and Italy are at last genuinely and verifiably doing the latter — a big if, admittedly — they should get the support of their European partners. At a time when Mr. Putin is moving tanks on Ukraine’s borders and brandishing Europe’s gas supplies as a political weapon, Europe can ill afford any additional crises, economic or political. Indeed, if they needed any additional reasons to value unity and pragmatism in their mutual economic dealings, the Russian leader has supplied them.