The foreign minister of Spain has a metaphor to describe Europe’s situation: the Titanic. “Even the first class passengers will drown,” he says, if the ship goes down.The ship is sinking. Spain is the fourth largest economy in the eurozone, and nothing is going right for it. Bad real estate loans in a collapsing housing market are pushing the country toward a huge bailout of sick banks. Unemployment is at a Depression level of 24 percent; youth unemployment is at 50 percent. Interest rates on the country’s debt are up sharply and its credit rating has just been downgraded. The Spanish government has no idea what to do.Meanwhile, with the Socialist François Hollande looking increasingly likely to become the next President of France, international commentators and politicians are beginning to wrap their heads around what this means for France, Europe, and the Euro. Opinions differ, but a few things are clear: Austerity is looking like a political loser, and Franco-German relations are about to become much tenser. The Economist is particularly pessimistic about the “dangerous” Hollande:
regardless of who wins, it looks like something along these lines is in store. The countries in Europe, especially those in the South, have reached a point where reforms to the core social model are needed—soon—to avoid a catastrophic breakup of the eurozone. But voters in those countries don’t want the changes to be made.In theory, there is a way to resolve this. The wealthier countries in the zone (which means Deutschland, über alles) would underwrite the debts of the laggards as the laggards gradually made reforms and reduced their spending. That would make the reform process easier and promote some growth in Europe.But the Germans believe — and they are almost 100 percent certainly right — that the Club Med countries plus Belgium and France will use any breathing space they get to water down or postpone reforms. After all, when they signed up for the euro, the Club Med countries knew that they needed to undertake ambitious reform programs to sustain their membership in the monetary union and they refused to do anything serious — especially in the super-sensitive area of labor markets.This has been the problem from the beginning: Club Med doesn’t want to live under German rules and Germany doesn’t want a Club Med currency. Club Med can’t make Germany underwrite the Club’s lavish lifestyle and Germany can’t make Club Med live by German rules.The pain in Spain and the increasingly anti-German, anti-reform tone of French politics point to a deepening crisis with no sign of an exit. Love of the blue social model, Mediterranean style, is killing the European dream.
The trouble is that unlike, say, Italy’s Mario Monti, Mr Hollande’s objection to the compact is not just about such macroeconomic niceties as the pace of fiscal tightening. It is chiefly resistance to change and a determination to preserve the French social model at all costs. Mr Hollande is not suggesting slower fiscal adjustment to smooth the path of reform: he is proposing not to reform at all. No wonder Germany’s Angela Merkel said she would campaign against him. […]It is conceivable that President Hollande might tip the balance in favour of a little less austerity now. Equally, he may scare the Germans in the opposite direction. Either way one thing seems certain: a French president so hostile to change would undermine Europe’s willingness to pursue the painful reforms it must eventually embrace for the euro to survive. That makes him a rather dangerous man.