True stimulus would leave the left turned off

The global economic and financial crisis that began in mid-2007 when the US sub-prime crisis burst on to the global agenda has taken many twists and turns and has had many mutations over the past five years.

The crisis has exposed serious flaws at the heart of the European economic and political project and the future of one of its most important aspects — the single currency — has come under serious threat. This threat has certainly been heightened by political events in France and Greece over the past week. Everything is now to play for in terms of the euro surviving in its current form.

The simple facts are that some members of the eurozone have excessive levels of government debt which have become unsustainable. The region is also characterised by sluggish economic growth and elevated levels of unemployment. The eurozone economy is expected to contract 0.5% this year and the unemployment rate has climbed to an average of 10.9% of the labour force, with the Spanish rate just south of 25%.

This represents an economic crisis unlike any that the area has experienced since the single currency was officially launched amid great fanfare in 1999.

The countries that lived way beyond their means are being forced to implement austerity policies. Such austerity is necessary because those people lending to the high-deficit countries have understandably decided that the debt levels have become dangerously high, and are either refusing to lend more money or are charging higher interest rates to account for the heightened risk. Those policies are not popular and have resulted in the ejection of Nicolas Sarkozy from office in France and a sharp shift to the extreme left in Greece.

The Greek situation is incredibly dangerous. The two key political parties committed to the terms of the bailout received just 31% of the vote and ended up with just 149 of the 300 seats in parliament. This is not enough to form a government, but it is also not clear that the Coalition of the Radical Left (Syriza) will be in a position to form a coalition government.

In this eventuality, another election would be needed, and if those parties supporting the bailout failed to win a majority in a second vote, the anti-austerity parties could come into government and immediately cast serious doubt over the possibility of Greece complying with the bailout conditions.

In this case, Greece would not get the funding required to run the country and service its debt and it would then be forced to default and leave the euro. From a eurozone perspective this in itself might not be a bad thing because Greece is a serious source of instability for the euro, but the risk is that it could prove very difficult to prevent one exit from the system cascading into something much more serious.

The election of François Hollande in France is also a cause for concern for the eurozone, but its significance is probably being exaggerated in some quarters. Hollande is in favour of rules that would impose fiscal discipline on countries, but he wants to see some growth strategy built into the fiscal treaty.

As a sop to Hollande, it is likely that the EU summit later this month will draw up some sort of protocol for promoting growth in the eurozone. Ironically, the left across Europe, including in Ireland, is pushing hard for a stimulus package, but a real and effective growth stimulus package based on competitiveness could involve the dismantling of many of the labour market regulations and trade union powers that the left holds dear to its heart.

Borrowing money to build hospitals and schools and roads does not represent sustainable stimulus in the true meaning of the word. A real and effective growth stimulus would involve structural reforms that the left might not be overly enamoured with.