Home and Dry? Home and Away would be closer

Yesterday’s elections in Greece and France might be seen as a vindication of what little strategy European leaders have presented to date:  the former’s confirmation of New Democracy suggesting a desire to engage with the bailout agenda; the latter opening up the way for a new growth agenda.  No more big challenges until the German federal elections in late 2013 and the job’ll sort itself out.

This is – with even a moment’s reflection – patently not the case. Just like the soap opera mentioned in the title, this situation is better understood as having endless plot changes, weak characterisation and no end in sight.

As the Spanish case highlighted last weekend, and as the Italian case highlights every few months, the contagion has spread throughout the eurozone and is not simply about sovereign debt.  The persistent failure of EU governments to find a constructive and pro-active solution three years ago have now called into question financial regulation, macro-economic policy-making and the extent of integration (both inside the eurozone and across the EU).  Those who argue for a roll-back to the good old days of the EEC fall into the same trap as many eurosceptics of thinking that we can wish it all away, when the situation clearly calls for an engagement with a globalised economy where public policy is much more constrained than it was a generation ago.  If markets are to be tamed, then collective and integrated action by governments has to be part of that.

I’ve argued before that President Hollande’s growth agenda is unlikely to gain traction without German support and that the latter is very unlikely, even in the medium term.  Notwithstanding the scale of the Socialist victory in the legislative elections, I would not change my opinion: as Robert Peston points out, the economically most useful for Greece is equity, which would have to come with a number of very extensive (political) costs.

So the EU finds itself stuck between not establishing a precedent of ejecting a member state from the Euro and not establishing a precedent of forgiving debts.  Instead, it risks simply building on its precedent of doing nothing much.