08 May 2012

Martin Wolf: What Hollande must tell Germany

The elections in France and Greece tell us that austerity fatigue has set in. This is not surprising. For many countries no plausible exit exists from depression, deflation and despair. If the currency union were a normal fixed exchange rate arrangement, it would collapse, as did the gold standard in the 1930s and the Bretton Woods system in the 1970s. The question is whether the fact that it is a monetary union will do more than delay that outcome. The last chance of bringing needed change rests on the shoulders of François Hollande, the newly elected president of France. Mr Hollande says his mission is to give Europe “a dimension of growth and prosperity”. So can he achieve this laudable aim?

First, he is going to have to forget almost all of his domestic promises, not only because they are not going to help France, but also because German leaders will not take him seriously otherwise.

Then the new president must embark on a serious discussion with the latter on how they expect the eurozone to end its crisis. He should give enthusiastic support to the wise recent remarks by Wolfgang Schäuble calling for higher German wages. He should then point out that there seem to be only five ways this can end. The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries. The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semi-permanent depressions in weak countries. The last would be partial or total break-up of the eurozone.

The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform. The chances that Mr Hollande can deliver such a changed perspective are small. But the currency union was a French plan. It was François Mitterrand, his Socialist predecessor, who signed the Maastricht treaty. His task and his goal must be to turn hostility into hope. He may fail. But he alone of European leaders has the desire and the ability to try.

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