Divisions deepen as tide turns against eurozone austerity
(PARIS) - Eurozone divisions over austerity policies championed by Germany deepened on Monday as Italy's new government joined France in demanding a change of direction for the crisis-hit bloc.
Italy's new centre-left Prime Minister Enrico Letta told parliament that the country was "dying from austerity alone", and France voiced optimism that the political tide was turning in favour of critics of austerity.
"In terms of growth policies, (French President) Francois Hollande will now have a stronger voice and be less isolated in Europe," France's minister for Europe, Thierry Repentin, told AFP.
Letta's direct challenge to the tough belt-tightening that Germany and its allies have advocated as the answer to the single currency zone's debt crisis follows criticism of the eurozone's direction from the International Monetary Fund (IMF).
The United States has also expressed concern over the impact of the bloc's woes on the broader world economy.
With the economic situation deteriorating in southern Europe, Spain last week secured an extra two years to meet European targets on the size of its budget deficit, warning that an economy in which over one in four of the workforce is unemployed could not withstand any more pain.
Italy's new leader picked up the theme on Monday, promising to focus on measures to kickstart an economy that shrank by seven percent in the five years up to 2012 and is forecast to contract by a further 1.3 percent this year.
Formerly an enthusiastic cheerleader for rapid fiscal consolidation, the IMF changed tack this month and started advising eurozone governments to slow the pace of spending cuts.
The alternative, it warned, is the risk of being trapped in a destructive, downward spiral which will ultimately only make it harder to meet deficit and debt targets.
As the IMF's managing director, Christine Lagarde, articulated it, cuts don't have to be "brutal, abrupt or massively front-loaded."
Hugo Brady of the Centre for European Reform in Brussels said such voices would inevitably influence thinking over time, but warned there was unlikely to be much change in Germany's stance before elections due in September.
"There has been increasing recognition that the kind of policies pursued have harmed as much as healed and that this is the reason Europe is not emerging from the crisis," Brady told AFP.
"Structural reforms are great but they can take 10 years to have an impact.
"But the fact of the matter is that nothing is going to change this side of the German elections because (Chancellor Angela) Merkel's position is popular with German voters."
Markets appeared relaxed Monday about the prospect of Italy loosening the fiscal reins, with the new government able to raise six billion euros on bond markets at lower rates than of late.
The receding threat of market turmoil forcing one or more countries to abandon the euro has arguably made it easier for France to push its pro-growth agenda, but its ability to get Germany on board is no longer what it was.
The extent to which divisions over economic policy have soured relations was underlined by the leaking over the weekend of a document in which members of Hollande's Socialist Party accused Merkel of selfish intransigence in her response to the debt crisis.
French ministers scrambled Monday to play down the significance of the paper, as did a German government spokesman, but the CER's Brady said the Franco-German axis that has driven European integration has rarely been in such bad shape.
"Relations are probably at a post-war low," he said. "The French are insecure over the state of their economy, while the Germans are over confident about theirs. So they don't have anything to say to each other. That's the biggest single problem the eurozone has right now."