Germany Faces Backlash Against Austerity Moves

German Chancellor Angela Merkel made all the right gestures Monday: the obligatory phone call congratulating French president-elect Francois Hollande. She vowed that the two will “work together well and intensively.” And she invited Hollande to Berlin after his inauguration and said she’d welcome him “with open arms.”

But clearly the French election results mark a setback for Merkel and her goal of solving Europe’s economic crisis with financial austerity.

She openly supported incumbent Nicolas Sarkozy. She insisted again on Monday in Berlin that an E.U. pact signed earlier this year limiting debt and imposing budget cuts across the 17 nation eurozone was not up for amendment or change, as president-elect Hollande would like.

“We in Germany are of the view, and so am I personally, that this fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” she said. Then she added, “We are talking about two sides of the same coin — progress is only to be achieved by solid finances plus growth.”

In Greece, parties that backed the two big E.U. bailouts lost their majority in parliament.

Merkel cautioned Greece to stick to its strict cost-cutting program. And there was bad news for Merkel at home as well: over the weekend voters in a northern state ousted a coalition led by Merkel’s conservative CDU party in local elections. It’s a setback that may hurt her party as it heads into national elections next year.

The backlash in Greece, France and elsewhere is hardly surprising: austerity that is mostly all pain with little prospect of gain has provoked street riots, protests and deep resentment.

Critics Say Austerity Is Too Rigid

Economist Irwin Collier at Berlin’s Free University says European voters have good reason to rebel. Merkel’s policy of aggressively pushing for debt-troubled countries to trim their public sector deficits, he says, has proved too rigid.

“The problem if you do it too fast and too soon you get into a vicious cycle where you start losing tax revenue and your deficits start mounting,” he says. “So it’s actually counter productive. This is clearly an instance where austerity has been far too front-loaded for the good of economic growth in the eurozone.”

For the German approach to succeed, Collier argues, debt-burdened countries would have to make these painful structural reforms during a period of growth.

“And for that to happen, Germany has to shift from being the stern schoolmaster of fiscal discipline to a locomotive of economic growth,” Collier says.

Merkel has been using the word “growth” more and more lately. But there’s little sign Germany will fundamentally change its approach to the debt crisis. Merkel’s spokesman on Monday referred to “growth through structural reforms” – meaning the current approach is the best one.

Eight Eurozone Countries In Recession

But there is little room for maneuvering. Eight eurozone countries are already in recession and unemployment in March across the zone hit its highest ever at 10.9 percent.

Others point out that Merkel is also a savvy realist with a pragmatic streak. So she may yet prove open to some kind of growth pact and change course somewhat, according to analyst Pieter de Wilde at Berlin’s social science research center.

“She knows she has a very skeptical German public behind her who very strongly believes in austerity and is very afraid of inflation,” he says. “But she has shown remarkable talent for political survival and relative willingness to go about that in a pragmatic way, so I wouldn’t be surprised if she manages to pull it off.”

And many German political elites hope Hollande also shows a pragmatic side in dealing with Berlin. As an editorial in the centrist Sueedeutsche Zietung put it today about Hollande: “Adieu, election campaign, bonjour reality.”

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