French crisis part of wider austerity debate

The eurozone’s flatlining economy took another hit yesterday when data showed German business sentiment sagging for the fourth month running, while a row over the lack of growth led the French government to resign. 

Politicians and policymakers, meanwhile, were digesting European Central Bank President Mario Draghi’s about-face on Friday, in which he called in a landmark speech for governments to use fiscal stimulus to revive the eurozone economy.

His comments were similar, if less direct, than those made on Sunday by leftist French economy minister Arnaud Montebourg, who condemned fiscal “austerity” and Germany’s “obsession” with budgetary rigour, triggering yesterday’s government resignation.

The eurozone economy registered no growth at all in the second quarter. At the same time, unemployment remains high and inflation is running at such low levels that deflation is a threat.

German chancellor Angela Merkel, visiting one of Europe’s few bright spots, recovering Spain, blamed some of her own country’s decline in the second quarter on the Russia-Ukraine crisis, over which tit-for-tat sanctions threaten trade.

The Munich-based Ifo think-tank echoed some of those sentiments as it reported its business climate index, based on a monthly survey of some 7,000 companies, fell to a worse-than- expected 106.3 from 108, the lowest level in more than a year.

French president Francois Hollande asked his prime minister to form a new government in the aftermath of the call by Montebourg and other rebel ministers for an economic policy U-turn.

France’s government wants to cut the country’s deficit and reduce the tax burden on companies by making €50bn of savings on public sector costs.

The economy has failed to grow for two consecutive quarters and France is failing to meet its deficit targets.

The row in France, however, is part of a larger debate among Europe’s leaders about whether fiscal austerity aimed at bringing debt under control is the right policy at a time of economic stagnation.

Draghi suggested in a high-profile speech last Friday that it may not be.

He said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy, adding: “and I believe there is scope for this“.

“It is admitting that the recovery might not come, that the eurozone’s problems go beyond structural reforms and austerity measures,” said ING economist Carsten Brzeski.

There had previously been a tacit coalition of ECB support for German-style fiscal austerity.