EU AT A CROSS ROAD

What if it is impossible for governments in France and Italy to abide by EU budget rules, because raising taxes and cutting public spending would crush economic activity and thus widen budget deficits instead of reducing them? What if electorates refuse to accept a decade of austerity and stagnation simply for the sake of preserving the EU monetary and fiscal rules?

The fact is that Europe has now reached a point where some of its rules will have to be changed or reinterpreted and some of its principles compromised. The only real question is whether Europe arrives at the necessary compromises through conscious political decisions or waits for them to be imposed chaotically by economic and electoral upheavals.

Will the Commission make a U-turn on fiscal austerity when it delivers its verdict on the French budget on Oct. 29, or failing that, in mid-November after a symbolic “re-negotiation” leading to some cosmetic strengthening of French structural reforms ?

While the EC will probably reprimand France to the fullest extent before getting to outright fines, it will also work up a new looser programme which gives it more time. This will help all sides save face and avoid the risk of further weakening French President Francois Hollande to the benefit of the Front Nationale (something which the EU wants to avoid).  The EC verdict on the budget will be one of the last acts of the Barroso Commission. The situation is of course further complicated by the hand-over of the EC and the wrangling over who will actually be in charge of enforcing the budget agreements. When all is said and done another muddle through is likely, but with the Eurozone facing economic stagnation investors may be less than convinced by such moves.

If Europe again disappoints expectations, the recession will deepen, with no serious hope of economic recovery next year. In that case, public opinion will veer onto a course of political nationalism and economic disintegration, not just in Greece and Italy but also in France and Germany. By next year it may be too late to reverse this.