The win of Francois Hollande in the run-off of the French elections represents a significant change in the political environment in Europe.  The austerity political correctness as pushed by the German policy makers following the Euro crises of 2011, will now have an influential advocate at the highest European political level, President Hollande, argueing that austerity will need to be accompanied by growth.  Common sense is gradually regaining momentum.   It is rationally not possible to reduce debt across Europe to the 3% norm, if economic growth is not stimulated at the same time.

The one-sided focus on austerity, and the effects thereof, has demoralized large sections of the population in Europe.   As a consequence, the confidence levels of people in the economy on a range of scores are low, pushing the economies into recession and the overall  unemployment rate in Europe to record levels (10,9%) with unemployment among the youth in Spain for example as high as 50%!  By voting for Hollande today, the French people have put economic growth back at the European agenda.

The case studies of The Netherlands and of Belgium are illustrative.  The Dutch have been the champions of austerity in Europe and have now become the victim of their own short-sightedness.  Meeting their self-imposed deadline of meeting the 3% deficit norm in 2013, the Dutch government collapsed and new elections have been called.  Meanwhile, the housing market, one of the drivers of domestic economic growth, has come to a stand-still.  The Dutch economy has turned into a recession. Government is planning to increase VAT, further affecting the purchasing power of the Dutch.  It endangers the recession to turn into a depression.  All creativity appears to be lacking to address the pessimistic mood in the Netherlands and to encourage the Dutch to spend themselves out of the recession and to reduce the deficit while government revenues increase in a growing economy.

In Belgium, at no time did austerity dominate the political discourse and Belgians were not talked into a depression.  While the Belgium government was reducing the deficit, the key message they communicated was that the purchasing power would not be affected.  Wages would continue to be perked to the inflation rate.  In other words, people were encouraged to continue their spending patterns and keep the economy on track.  The result is that although the economic forecast for the first quarter of 2012 was an economic decline of 0.2% in reality Belgium saw a growth of 0.3%, a positive difference of 0.5%.  That may not be a lot, but under the current economic conditions in Europe a significant achievement.  Belgium will reach a target of 2.8% for the deficit by 2013, below the 3% norm. The political discourse in Belgium is miles apart from the discourse in The Netherlands, with noticeable and interesting effects at the economic performance of both countries.

President Hollande was not the first to argue for a more pro-active European growth strategy to complement the EU fiscal pact of December 2011 with its focus on austerity.  The IMF president Christine Lagarde has advocated the need for European investment in growth for some time.  Recently, the President of the ECB, Mario Draghi, has also put growth more centrally in his approach to the solving the Euro crises.  In fact, the EU itself has started the turn the corner by convening at the end of May or early June a special EU Summit on the subject of European growth.  It will give the new French government, with the support of other European governments such as the Belgium’s, the opportunity to argue that the fiscal pact will need to be complemented by a growth pact.

Although the policies advocated by Hollande are projected in the mainstream European media to cause big controversy between the new French government and the rest of Europe, I believe this to be a wrong analysis.  In fact, Angela Merkel will quickly learn the lesson of the defeat of her friend Sarkozy.  Pushing countries into recessions will eventually also harm the German economy and reduce her own chances for a re-election.  Also, personality wise, there is no reason to expect why Merkel and Hollande would not go well together and establish a strong working and personal relationship.   If this is going to happen in the coming weeks and months, it can be expected to result in a more balanced and future-oriented  approach to overcome the financial crises that continues to affect the Euro-zone.

May 6th, 2012.