BERLIN—Europe's voters delivered another rebuke to their leaders Sunday for failing to overcome a debt crisis that has thrust much of the region into an economic tailspin.
Less obvious is what Europeans expect their governments to do differently. From Greece to France, incumbents lost power—joining a long list that includes the former leaders of Spain and Italy.
But their successors will likely find it difficult to pursue policies that deviate much from the austerity-focused course championed by Germany, Europe's paymaster.As Europe's only healthy large economy, Germany's support would be essential for any change.
And Chancellor Angela Merkel and her government, fearful of popular resistance in Germany, have made clear in recent weeks that they wouldn't soften their austerity demands, no matter who won Sunday's elections.
"We will remain as tough on these issues as before," said Volker Wissing, a financial-policy expert for the Free Democrats, the junior coalition partner in Ms. Merkel's government.
"We are fighting for currency stability. There is no possibility to soften the currency with Germany." Markets present another challenge.
As renewed turbulence suggests, investors continue to ask whether Europe can overcome its debt woes and keep its currency intact. Asian markets opened lower on Monday, in part in reaction to the elections.
In early trading, Tokyo tumbled 2.8%, Australia fell 1.6%, Hong Kong was down 2.3% and South Korea fell 1.7%. Turning away from austerity could trigger a further selloff in credit markets.
If François Hollande, whom France elected president, were to embark on a Keynesian stimulus program, for instance, investors could doubt France's commitment to fiscal discipline.
That would put its credit rating—key to keeping its cost of borrowing down—at risk. "Just because investors are increasingly concerned about the lack of growth in the euro-zone's periphery does not mean that Keynesian policies would be well received by the markets," said Nicholas Spiro of Spiro Sovereign Strategy, a London-based research firm.
"On the contrary. Any short-term fiscal stimulus in the periphery would fan concerns that the crisis will drag on even longer and would severely undermine the credibility of Germany and the ECB."
Even as the political lineup changes, Ms. Merkel and her hawkish allies at the European Central Bank remain firmly in control of European economic policy.
Like Ms. Merkel, ECB President Mario Draghi and the influential Bundesbank President Jens Weidmann oppose any moderation of European structural reform, fiscal stimulus or the creation of common European bonds.Moreover, German Finance Minister Wolfgang Schäuble is expected to take over leadership of the euro group, a key forum for shaping the euro zone's crisis response.
And German officials already control other levers in Europe's crisis-fighting framework, including its main bailout fund, the European Financial Stability Facility.
It is possible Berlin might be open to some compromises. One potential area is using the bailout fund to help the continent's beleaguered banks. European banks are among the largest holders of the region's government debt and have been forced to take substantial losses on some of those holdings.
In addition, the worsening economic environment caused by the deep public spending cuts in countries such as Spain and Portugal have put additional pressure on banks as private and commercial creditors default. Under the current rules, Europe's bailout fund can lend only to governments and not directly to banks.
That means that a country such as Spain would have to take on substantial new debt to bail out its banking system, threatening its own access to capital markets.
Berlin has been under pressure to accept a relaxation of those rules, but has so far resisted, amid concern that banks would become dependent on the aid.
A bigger question is how broad the popular backlash in France, Greece and other corners of the euro zone can get—and whether it ultimately could undermine efforts to preserve the euro.
Before the debt crisis, few Europeans realized the degree to which they were sacrificing their national sovereignty by joining the currency union.
But in Greece, Spain and other struggling countries, Berlin's growing political and economic influence has served as a painful lesson of the increasing powerlessness of their own governments.
During the election campaign in France, supporters cast Mr. Hollande as the champion for these Southern European countries whose economies are being strangled by Germany's austerity prescription. The question now is whether he will fill that role or prove more accommodating.
Mr. Hollande has called for changing Europe's "fiscal compact"—the cornerstone of Ms. Merkel's policy in the fight to resolve the euro-zone debt crisis. He has also promised to pursue an alternative "growth compact" that would somehow feed money into Europe's weakened economies.
Yet a new approach will be tough without some German support. Mr. Hollande "will not get his maximal demands and overturn everything in Europe," said Joachim Scheide, chief economist at World Economy Institute.
wsj.com
Less obvious is what Europeans expect their governments to do differently. From Greece to France, incumbents lost power—joining a long list that includes the former leaders of Spain and Italy.
But their successors will likely find it difficult to pursue policies that deviate much from the austerity-focused course championed by Germany, Europe's paymaster.As Europe's only healthy large economy, Germany's support would be essential for any change.
And Chancellor Angela Merkel and her government, fearful of popular resistance in Germany, have made clear in recent weeks that they wouldn't soften their austerity demands, no matter who won Sunday's elections.
"We will remain as tough on these issues as before," said Volker Wissing, a financial-policy expert for the Free Democrats, the junior coalition partner in Ms. Merkel's government.
"We are fighting for currency stability. There is no possibility to soften the currency with Germany." Markets present another challenge.
As renewed turbulence suggests, investors continue to ask whether Europe can overcome its debt woes and keep its currency intact. Asian markets opened lower on Monday, in part in reaction to the elections.
In early trading, Tokyo tumbled 2.8%, Australia fell 1.6%, Hong Kong was down 2.3% and South Korea fell 1.7%. Turning away from austerity could trigger a further selloff in credit markets.
If François Hollande, whom France elected president, were to embark on a Keynesian stimulus program, for instance, investors could doubt France's commitment to fiscal discipline.
That would put its credit rating—key to keeping its cost of borrowing down—at risk. "Just because investors are increasingly concerned about the lack of growth in the euro-zone's periphery does not mean that Keynesian policies would be well received by the markets," said Nicholas Spiro of Spiro Sovereign Strategy, a London-based research firm.
"On the contrary. Any short-term fiscal stimulus in the periphery would fan concerns that the crisis will drag on even longer and would severely undermine the credibility of Germany and the ECB."
Even as the political lineup changes, Ms. Merkel and her hawkish allies at the European Central Bank remain firmly in control of European economic policy.
Like Ms. Merkel, ECB President Mario Draghi and the influential Bundesbank President Jens Weidmann oppose any moderation of European structural reform, fiscal stimulus or the creation of common European bonds.Moreover, German Finance Minister Wolfgang Schäuble is expected to take over leadership of the euro group, a key forum for shaping the euro zone's crisis response.
And German officials already control other levers in Europe's crisis-fighting framework, including its main bailout fund, the European Financial Stability Facility.
It is possible Berlin might be open to some compromises. One potential area is using the bailout fund to help the continent's beleaguered banks. European banks are among the largest holders of the region's government debt and have been forced to take substantial losses on some of those holdings.
In addition, the worsening economic environment caused by the deep public spending cuts in countries such as Spain and Portugal have put additional pressure on banks as private and commercial creditors default. Under the current rules, Europe's bailout fund can lend only to governments and not directly to banks.
That means that a country such as Spain would have to take on substantial new debt to bail out its banking system, threatening its own access to capital markets.
Berlin has been under pressure to accept a relaxation of those rules, but has so far resisted, amid concern that banks would become dependent on the aid.
A bigger question is how broad the popular backlash in France, Greece and other corners of the euro zone can get—and whether it ultimately could undermine efforts to preserve the euro.
Before the debt crisis, few Europeans realized the degree to which they were sacrificing their national sovereignty by joining the currency union.
But in Greece, Spain and other struggling countries, Berlin's growing political and economic influence has served as a painful lesson of the increasing powerlessness of their own governments.
During the election campaign in France, supporters cast Mr. Hollande as the champion for these Southern European countries whose economies are being strangled by Germany's austerity prescription. The question now is whether he will fill that role or prove more accommodating.
Mr. Hollande has called for changing Europe's "fiscal compact"—the cornerstone of Ms. Merkel's policy in the fight to resolve the euro-zone debt crisis. He has also promised to pursue an alternative "growth compact" that would somehow feed money into Europe's weakened economies.
Yet a new approach will be tough without some German support. Mr. Hollande "will not get his maximal demands and overturn everything in Europe," said Joachim Scheide, chief economist at World Economy Institute.
wsj.com
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