The case against austerity growing
It is not long since Premier Wen Jiabao urged Europe to put its house in order in return for help with its debt crisis. Now Europe is a house divided by a groundswell of popular resistance to deficit-cutting austerity. Weeks after 25 countries signed a rigorous fiscal pact, the legitimacy of the economic strategy of the euro zone's governing elite, led by German Chancellor Dr Angela Merkel, is being challenged at the ballot box. President Nicolas Sarkozy, Merkel's chief ally, trailed in the first round of his bid for re-election in France and faces a difficult run-off with his socialist opponent. Internal revolt has forced the Netherlands, a joint architect of austerity, to the polls. Unpopular spending cuts have brought the Czech government to the brink. Countries are sliding back into recession, despite the injection of US$1.3 trillion in cheap loans by the European Central Bank.
The issue is the lack of policies for economic growth. From financial markets to the ballot box to the street, the message that governments cannot just cut their way to fiscal health is increasingly loud. Sarkozy's former finance minister Christine Lagarde, now managing director of the IMF, and US Treasury Secretary Timothy Geithner have echoed it, calling for budget cutting to be reined in to allow some form of stimulus spending. Even Sarkozy has begun to talk about the need for growth.
Some observers have cautioned against interpreting the electoral swings as votes of no confidence in mainstream parties that can open the door to extremists. Rather, they are seen as a revolt against collective, one-size-fits-all euro-zone leadership. The beneficiaries are more likely to be populists, which has implications for European unity and national budgetary sovereignty.
So long as the crisis drags on, it will affect the real economy through unemployment, benefit cuts, credit squeezes and company failures. This has to be a worry for China, given that Europe is its biggest market. Wen this week added his voice to those of Lagarde and Geithner in bemoaning the lack of new economic growth points. He said more investment and technical innovation would be the real drivers of global recovery. The continuing crisis does nothing to advance those aims.
Fiscal discipline is indispensable to sustainable recovery. But there must be a growth dividend if weaker countries are to escape from a debt trap and European unity is to be safeguarded. More consensus on the need for growth policies doesn't throw any light on what they should be. Germany may come under renewed pressure to accept some form of common European debt such as euro bonds that member countries can tap to stimulate growth. If socialist Francois Hollande becomes president of France, that could be a catalyst for renegotiation of the austerity regime. Whatever the outcome, it will matter far beyond Europe's borders - not least for Hong Kong's externally oriented economy.