The election of François Hollande as the new French President will give a lift to other European leaders, such as Italy’s Mario Monti, who want to temper austerity with measures to stimulate growth.
Despite mutterings from Berlin this morning that Germany has no intention of renegotiating the European fiscal pact, German Chancellor Angela Merkel has signaled that she would be open to some growth-tilted measures to go along with the fiscal pact.
What seems likely to happen is that the pact will not be reopened. Merkel seems unlikely to shift on that — after all, she considers the agreement very much her baby. But she won’t oppose a side-agreement that contains several measures aimed at stimulating euro-zone growth.
But the negotiation over those measures is what is going to be tough and potentially highly divisive. Two different visions of what is need for growth are going to be in conflict.
Hollande’s is more public sector-based and involves government borrowing and spending on things like the development of infrastructure. He has suggested, for example, raising money for major road improvements with so-called European Project Bonds.
The competing vision can be seen in the approach of the classical liberal Monti and the new European Central Bank chief Mario Draghi, the Italian banker and economist who succeeded Jean-Claude Trichet at the ECB last autumn.
Both Monti and Draghi are pushing for major structural reform, arguing this would prompt sustainable growth. That involves reducing the public sector and reforming rigid labor markets making it easier for firms to hire and fire.
Both sides are likely to find considerable common ground – hence my argument yesterday that there will in effect be a Hollande-Monti dynamic driving much of EU politics in the coming months. Together the two have the clout to push Merkel. But it isn’t going to be easy to merge the two visions and settle on agreed measures.
There will be consequences for Hollande with his own supporters. Fifty-six percent of France’s GDP now goes on the public sector – that’s a higher proportion than Sweden’s. Any resulting growth agreement made by euro-zone leaders is still going to mean that Hollande having to cut back on the public sector, to disappointment those who celebrated his victory last night in Paris.