Two major events have changed Europe’s outlook for the near future: the election of socialist François Hollande to the French presidency, and the failure of Greece’s largest parties to form a cohesive government. Both of these signal a desire to move away from austerity measures insisted upon by the euro zone and, in particular, German Chancellor Angela Merkel.
François Hollande won the French presidency on promises of renegotiating the Greek bailout terms, and of promoting growth as an end to the sovereign debt crisis. On Tuesday, the same day he was sworn in, President Hollande flew to Berlin to meet with Chancellor Merkel to discuss strategy for the euro. Both leaders are facing enormous pressure: the French president must provide some indication he will stick to his campaign promises, particularly with French parliamentary elections around the corner, and Chancellor Merkel must stand by her prescription of austerity and good governance. Whether these two can reconcile their differences and form both a short-term growth-oriented plan and a longer-term debt-reducing formula remains to be seen.
Also on Wednesday, Greece’s political parties demonstrated how far apart they stand on euro politics when they failed to form a new government. New elections are tentatively set for June 17, but the radical left party (known as Syriza) is gaining momentum based on their leaving the loan agreement. Nearly all Greek parties say they will renegotiate the terms of the loan agreement, indicating that nobody thinks Greece can pay off its debt in accordance with the outlines.
The message Greek people are sending is clear: they support the idea of the euro and the positive economic boost it gave their country, but are unwilling to conform to the necessary measures – both before the crisis and now. The only question that remains is who will give in first – the Germans or the Greeks?
If Germany (and austerity) prevails, and Greece can somehow get its finances in order, the crisis will next move to Portugal, or Ireland: countries that have enormous debt-to-GDP ratios and will soon be in dire situations. What will remain intact is commitment to the European dream of the euro, and a unified economic and monetary system. Strong reforms, and a stronger governing system are necessary in order for the euro to continue.
If a Greek exit (creatively called “Grexit”) occurs, it would indicate that Chancellor Merkel is giving in to defiance, prompting other countries to do the same, and thus creating a domino effect. There is much speculation as to whether Europe can fortify its economies enough to withstand a Greek exit. Further, a downward economic spiral would be bad for world markets (including Greece’s). The choice is between a bad situation and a worse one.
Looking forward, it is imperative that President Hollande and Chancellor Merkel (unfortunately, there isn’t an agreed-upon nickname as of yet) present a comprehensive plan for the future of the euro, one that includes looser labor markets and greater inflation, coupled with significant regulatory reforms, growth, and fiscal requirements. Unfortunately, it's unlikely that anyone will be happy. But, isn't that the definition of good comprimise?