The New York Times on growing resistance to austerity:
A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.
Spain officially slipped back into recession for the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.
It was only in March that leaders from 25 of the 27 European Union countries gathered to sign the fiscal compact championed by Ms. Merkel. Her plan, combined with $1.3 trillion in cheap loans injected into the banking system by the European Central Bank in December and March, raised hopes that the worst of the crisis had passed.
But those hopes have been dashed as growth has faltered and interest rates on the debt of struggling countries like Spain and Italy have shot up to dangerous levels again.
Another possibility, which Germany will be under renewed pressure to accept, is some form of common European debt, generally referred to as Eurobonds, which any member of the currency zone could tap. It is a step that Ms. Merkel’s conservative bloc has opposed forcefully, but with more than 17 million people in the euro zone out of work and the unemployment rate at 10.8 percent, the need for urgent steps is growing.
Marie Diron, an economic adviser to the consulting firm Ernst & Young, said Germany could slow down its own drive to balance its budget and do more to encourage domestic consumption. Other European states would benefit if Germany bought more of their goods.
“Austerity has to fit into a wider policy context,” Ms. Diron said.
Ms. Merkel has proved herself a masterful tactician time and again. She was adept at working with the Social Democrats as her partner in the previous German government, and Mr. Hollande might be even more amenable than Mr. Sarkozy to ceding French sovereignty in economic policy in exchange for help on growth, Mr. Vaquer from the Barcelona Center for International Affairs said.
“She will have to backtrack on austerity anyway,” Mr. Vaquer said. “Germany can now extract a much more unified Europe in terms of economic governance than it ever could have before.”
I've thought for a while that Germany was eventually going to have to back down on austerity. Vaquer's comments point to the end game: after holding out for years, bringing Europe as a whole to the brink of recession (and shoving many periphery countries over that brink), Germany will finally relent, but not without extracting major sovereignty concessions from the rest of Europe and transferring much more power over economic policy to Brussels.
So perhaps Merkel has known all along that austerity was never going to stick, and that the EU was going to have to become more of a transfer union in to survive. But she held out for years, pretending not to grasp this, in order to put the fear of Yahweh into Germany's European partners. Mildly cunning, ruthless, Machiavellian! Not words that many Germans like seeing applied to their relations with the rest of Europe, but when it comes to protecting its economic interests, Germany behaves like any other country. This episode can, of course, be added to the tu quoque list I recently threw together, when a German criticizes the United States of ruthlessly pushing its economic agenda on weaker countries.