Tackling Europe’s growing pains

While the Danish PM sides with austerity, France’s new socialist president argues that Europe will only grow through investment

Clutching a red rose – the symbol of the European left – after his election last week, France’s new socialist President François Hollande seemed the perfect bedfellow for Denmark’s Socialdemokrat PM, Helle Thorning-Schmidt.

But despite both finding a home on the political left, the two leaders have proposed different strategies for creating growth in stagnating European economies. While Thorning-Schmidt supported the EU fiscal compact treaty that was designed to prevent EU member states from overspending, Hollande has been a vocal critic, arguing that the treaty focuses too much on austerity, or cutting public spending to reduce sovereign debt. Throughout his election campaign, Hollande promised to renegotiate the treaty and add specific initiatives that support economic growth.

Hollande’s campaign calls for growth initiatives met a frosty reception by European leaders wary of becoming saddled with more debt. Thorning-Schmidt is among them, sharing German Chancellor Angela Merkel’s fears of borrowing to invest and stimulate flagging European economies. Instead, the Danish PM has laid out an economic plan, the so-called 2020 plan, which hopes to stimulate growth in Denmark through reform, rather than investment.

In an interview last weekend with Politiken newspaper, Thorning-Schmidt argued that reducing Denmark’s deficit was key to its efforts in rekindling the economy.

“We have always said that we need to get our finances under control while also stimulating growth,” Thorning-Schmidt said. “I believe, both in Europe and Denmark, that the two things are dependent on each other. We have to understand that, in our modern times, there is no use in running a deficit that keeps us in debt year after year. It is punished by the markets, which increases our interest. It’s expensive and reduces demand in the Danish economy.”

Domestically, the government is banking on labour and welfare reform, which is hoped to increase the workforce, as well as other initiatives such as reform in their energy sector, which will move the country away from carbon energy sources, to encourage investment and job creation in the green energy sector.

The Danish government believes the same principles apply in Europe and has actively pushed their green agenda as current EU president. The energy efficiency directive that is currently being negotiated is hoped to stimulate growth and create jobs in Europe as it pursues its aim of reducing energy consumption in 2020 by 20 percent.

The government is not anti-investment, however, and their 2020 plan does state that public investment will help stimulate economic growth. But by keeping the level of public investment at 1.8 percent of GDP – the historic average before the financial crisis – the government can avoid the accusation that it is relying on spending rather than reform for its economic recovery.

Toward a 'growth treaty'

Merkel is Hollande's main adversary in the renegotiation of the fiscal compact treaty, which she fashioned together with Hollande’s predecessor, Nicolas Sarkozy. Merkel is an advocate of austerity, telling the lower house of the German parliament, the Bundestag, last week that growth and deficit reduction were joined aims.

“Growth through structural reforms is sensible, important and necessary,” Merkel said, according to Euractiv. “Growth on credit would just push us right back to the beginning of the crisis, and that is why we should not and will not do it.”

Merkel’s message is the same as Thorning-Schmidt’s: countries have to create growth while spending within their means and this is only achieved through structural reform that both improves business conditions and creates jobs. Plunging a country into debt to invest in one’s economy, both Merkel and Thorning-Schmidt argue, will only make the situation worse.

After Tuesday’s meeting between Hollande and Merkel, however, the German chancellor’s hardline position may be starting to soften. The leaders met on the same day that Hollande was inaugurated, highlighting the importance of their relationship in finding solutions to Europe’s debt crisis. At the press conference afterward, the leaders admitted that the dire situation in Greece was their main focus of discussion. More importantly for their relationship, however, Merkel appeared open to Hollande’s suggestions for growth initiatives.

“Growth needs to reach the people and that’s why I’m happy that we are discussing different ideas on how to achieve this growth,” Merkel said.

Hollande has made several suggestions on how to raise money for investment, among them a call for greater investment in the European Investment Bank (EIB), which invests in European businesses and projects. Initial reports suggest that capitalising the EIB will be the focus of a new ‘growth treaty’ that would complement the fiscal compact and offer a compromise that would satisfy both Hollande’s calls for EU growth initiatives and Merkel’s refusal to renegotiate the fiscal compact treaty.

Negotiations to fashion a compromise growth treaty will continue in Brussels next week and are intended to be finalised at a summit of leaders in late June. In the meantime there is a lot of work to do in finding a solution to Europe’s sluggish economy – the French economy stagnated in the first quarter of 2012, according to figures released Tuesday.

In Denmark, economists are split on whether Thorning-Schmidt’s 2020 plan will achieve the 2.25 percent annual growth predicted between 2014 and 2020. Of 37 economists polled by Ritzaus Bureau, 17 said the plan was unrealistic while 16 said it was realistic. While it's not a convincing answer, it seems to confirm that the only certainty about the future of the Danish and European economies remains uncertainty.