Growth Compact which Draghi , Merkel , Hollande espouse has a world of difference in the details as to what that means - cue more disagreements once Hollande dispatches Sarkozy in a week...

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9234926/Hollandes-Growth-Bloc-spells-end-of-German-hegemony-in-Europe.html

The French-led counter-attack and rumblings of revolt through every branch of the EU institutions last week have brought this aberrant phase of the eurozone crisis to an abrupt end.

"It’s not for Germany to decide for the rest of Europe," said François Hollande, soon to be French leader, unless he trips horribly next week. Strong words even for the hustings.

"If I am elected president, there will be a change in Europe's construction. We’re not just any country: we can change the situation," he said.

European allies are flocking to his cause from left and right, he claims. Not even Austria supports Germany’s austerity drive any longer.

This then is the birth of a Euroland growth bloc with well over 200m people and a commanding majority vote in the European Council, a defining moment in this saga. Mario Draghi at the European Central Bank is quickly bending to the new political dispensation with calls for a "Growth Compact". The Commission - liberated at last - is finding ways to "extend deadlines" on fiscal targets.

Mr Hollande plans an EU-wide call for renegotiation of Europe’s punitive pact on his first day in the Elysée. For this he was instantly rebuked by Angela Merkel. Pacta Sunt Servanda. "The treaty cannot be renegotiated," she said, forgetting the Kohl maxim that every German chancellor must bow three times before the Tricoleur.

The unratified treaty can of course be renegotiated, or disappear into the dustbin where such reactionary rubbish belongs. Mrs Merkel cannot push it through the Bundestag in any case without the Social Democrats, who are warming to Mr Hollande.

Mrs Merkel will have to relearn the forgotten art of compromise. Unable to dictate terms, she may struggle to deflect the ruinous implications of monetary union onto other EMU countries for much longer.

It is worth remembering that German taxpayers have not yet bailed out anybody, whatever they may believe. Berlin has rejected all forms of debt pooling, Eurobonds, or fiscal transfers, understandably since full budgetary union would violate Germany’s constitution and eviscerate their democracy.

Chancellor Merkel has agreed only to a "Stability Union", with greater power to police debtor states. The rescues for Greece, Ireland, and Portugal are loan packages at stiff interest, not grants.

I heard an official from the chamber of industry and trade (DIHK) say with disarming candour that the euro has put Germany in an almost perfect position, even if the single currency was thrust upon a reluctant German nation in the first place - and even if 56pc would prefer a return to the D-Mark now. "Imagine how strong the D-mark would be today and how much higher interest rates would be if we weren’t in the euro."

This is true. It is also a surreal state of affairs. Germany cannot ride a perpetual trade surplus with Club Med without blowing up the system (which must balance), nor can it hope to escape the inflationary revenge of such a policy mix on its own internal economy. The advantage is a short-term illusion, a trap.

It is remarkable that Berlin has met so little resistance until now in driving through a fiscal treaty that puts all the burden of resolving EMU imbalances on the weaker states, and that almost no country wants; or in enforcing its lethal doctrine of "expansionary fiscal contraction" on economies trapped in debt-deflation; or in toppling elected leaders in Greece and Italy; or in imposing bondholder haircuts in Greece against warnings from the ECB - warnings soon realised as contagion engulfed Ireland, and now threatens to engulf Spain too, with Italy yoked in tandem, and France yoked in turn through trade and debt exposure.

This catalogue of misjudgement was possible only because Nicolas Sarkozy went along at every stage rather than deploy France’s swing power in the EU system to call a halt. He sacrificed all for the illusion of Franco-German parity.

Let me be clear, fiscal tightening is necessary, but not beyond the therapeutic dose of 1pc of GDP in net cuts each year, not combined with a shrinking money supply and a collapse in loan demand, and not imposed before southern Europe reaches "escape velocity".

The EU’s policy mix ignores a century of economic history and science. The result is an entirely avoidable slide into a double-dip slump across half of Europe, a depression of choice so to speak. As the Spanish foreign minister Jose Manuel Garcia-Margallo said over the weekend, Spain is now in a crisis of "huge proportions".

Premier Mariano Rajoy had hoped to repeat the turn-around 'milagro’ of the mid-1990s when Spain came back from the dead to meet the entry terms for EMU, that cruelly Pyrrhic achievement. But it was a booming world then. The peseta had just been devalued, and nobody was questioning the solvency of EU sovereign states. Mr Rajoy must by now see the error of that comparison. Unemployment has risen by 400,000 to 24.4pc since he took office before Christmas.

Note that Standard & Poor’s did not cite lack of fiscal rigour when it cut Spain’s credit rating two notches to BBB+ last week. It blamed "economic contraction", fragile banks, and the incoherence of EU policies. Will Mr Rajoy really grind his country into collapse with two more years of fiscal squeeze when rating agencies say it will not help anyway?

Neil Mellor from BNY Mellon said the latest blows are pushing Spain "toward a point of no return". We will find out next at Thursday’s auction whether Spanish banks can absorb much more of their own country’s debt. If not, the crisis will quicken since almost nobody else is buying.

It is obvious what must be done. The contraction policies must be halted immediately. Nominal GDP growth must be restored to its trend line by monetary means. The ECB must be given treaty powers to act as a genuine lender of last resort, able to intervene with sufficient force to take all risk of sovereign default off the table in Spain and Italy.

The Latin Bloc might politely tell Berlin: acquiesce in the new landscape, or expect Latin Europe to take matters into its own hands and bring about the fiscal, monetary, and exchange conditions needed to safeguard its societies - entailing a very nasty shock for German banks and exporters.

No such showdown is about to happen of course. Mr Hollande is an Enarque at heart, easily bidable. He may be fobbed off with a bigger role for the European Investment Bank. Italy's Mario Monti is a true-believer in the European Project. He wants "targeted investments" to lift short-term demand, not revolution. The EU elites will try to muddle through. If policy is loosened enough, they may just succeed.

Yet the mood has at least changed. The faintly Petaniste era of Merkozy is over. "There will be no more talk of a virtuous North and a sinner South. There will be a Europe of countries with their history and character, each with their strengths and weaknesses," said Hollande ally Arnaud Montebourg.

As for Germany, we will find out what its pro-European rhetoric means when it no longer calls the shots. Or put another way, the epicentre of Europe's political crisis may soon be Germany itself.

http://www.spiegel.de/international/europe/0,1518,830185,00.html

Austerity Backlash Unites European Leaders

By Stefan Kaiser

REUTERS

European Central Bank President Mario Draghi has suggested a 'growth pact.'

Be it austerity queen Angela Merkel or Socialist François Hollande, European politicians are suddenly in agreement with ECB President Mario Draghi's proposal to round out the European fiscal pact's austerity measures with a "growth pact." But many seem to have a different idea about what this means.  

It's so nice to see Europe in agreement once again. Whether it's German Chancellor Angela Merkel, European Commission President José Manuel Barroso or French presidential candidates François Hollande and Nicolas Sarkozy -- everyone seems to think a "growth pact" for the continent is a good idea. But it is precisely this agreement that should make one skeptical -- because all the vague phrase really does is verbally lump together Europe's tremendous conflicts of interest.

The suggestion came from European Central Bank (ECB) President Mario Draghi. "We have had a fiscal compact," Draghi told the economic and monetary affairs committee of the European Parliament on Wednesday, referring to the treaty European governments signed in March, pledging to toughen their spending rules. "What is most present in my mind now is to have a growth compact."

Since then, the concept has garnered acceptance from all sides. "Growth is the key, growth is the answer," European Commission President Barroso said in a speech. In France, where the presidential campaign continues, both conservative incumbent Sarkozy and his Socialist challenger Hollande saw affirmation of their own positions on the issue. Hollande said it went in the same direction as his earlier policy suggestions, while Sarkozy said that a policy based on austerity alone would be a mistake.

Devil in the Details

But the unanimous approval of Draghi's suggestion conceals just how far apart its proponents are on details. What ECB President Draghi has in mind has little to do with Socialist Hollande's notions. "He doesn't necessarily have the same measures in mind as me to foster growth," Hollande admitted in a radio interview on Thursday. But this disagreement has somehow been overlooked.

Once the confusion over language has been swept aside, it becomes clear that Draghi's position is closer to that of German Chancellor Angela Merkel. She, too, has of course rushed to declare that a growth pact would be a good thing, but that she viewed that pact as entailing "structural reforms," the same phrase used by Draghi, and not economic stimulus plans that would "again increase national debt."

Of course, this phrase "structural reforms" is also an elastic one. Under this category one could envision labor market reforms, for example. Jörg Asmussen, the German member of the ECB's executive board, told the Financial Times Deutschland on Thursday that this could include reforms like the Agenda 2010, a series of labor market and social welfare reforms introduced by former Chancellor Gerhard Schröder that completely restructured Germany's welfare state. But easing job dismissal protections, lowering bureaucratic hurdles for starting businesses, setting a higher retirement age and lowering non-wage labor costs are also typical examples of structural reforms.

These measures all have a common element, though. They apply to the supply side of the labor market, and are meant to make it easier for companies to do business, thus strengthening growth in the long term. But they would hardly do anything to battle the kind of acute recession that many European countries now face.

To do that, the belt-tightening policies must be eased, much like Hollande has called for. He wants to use the upcoming presidential run-off election as a referendum on Europe's economic policies. "Today many heads of state and government are waiting for the French election to open these discussions," he said Wednesday.

Structural Reforms, Not Stimulus

It's clear to analysts, however, that Draghi has something different in mind with his "growth pact" idea. "For the ECB, a growth compact does not mean more fiscal stimulus," said analyst Carsten Brzeski at Dutch bank ING. Rather, the central bank sees it as "structural reforms with a vision," he said. Hollande's suggestions, on the other hand, are "good old-fashioned Keynesian stimulus of the economy" in the tradition of British economist John Maynard Keynes, he said.

During the economic crisis of the 1930s, Keynes argued that the state must use spending programs to increase demand and jumpstart the economy. This began an economic school of thought that came back into fashion during the crisis of 2008 and 2009, when the German government also used Keynesian instruments to fight the market collapse.

Berlin approved a major program for road construction and the modernization of schools, for example. And the cash-for-clunkers scheme, which promised new car buyers a premium for scrapping their old vehicles, was also a classic demand-oriented economic stimulus package -- financed through additional government borrowing.

The German government has since returned to a course of austerity. But this doesn't necessarily apply to Germany's own budget, which is currently being consolidated through growing tax revenues rather than political cutbacks. When it comes to other EU countries, however, Merkel and her Finance Minister Wolfgang Schäuble have remained tough, forcing through a fiscal pact that will require frugal national budgets and debt brakes across Europe.

Austerity Backlash

Opposition to this austerity dictate is growing -- and it's not just the French who want to renegotiate the fiscal pact. The Dutch, who have so far been viewed as dependable supporters of Merkel's euro policies, are also threatening to veer away from the path of savings.

At the beginning of the week, Prime Minister Mark Rutte's government resigned after failed austerity talks. Before it goes, his government wants to ensure that all austerity measures it has already agreed to are implemented, but it remains questionable whether it can succeed with those efforts. With the country locked in a recession since last summer, criticism of the budget consolidation policy has grown increasingly loud in the Netherlands.

In crisis-burdened countries like Italy and Spain, as well, grumbling over the fiscal pact has also intensified. In April, Italian Prime Minister Mario Monti announced his goal of achieving a balanced budget in the coming year. "Everything, everything, everything that we are doing now is aimed at helping growth," he said.

At first glance it appears that Draghi supports such efforts with his "growth pact." But a closer inspection revels that the ECB chief doesn't want to go that far. The heavily indebted countries must cut their deficits, he said, calling it "unavoidable."