The Post Austerity Way Forward for Europe

Italian voters delivered a hopelessly inconclusive election result last week. But the message they sent–to their political leaders, to Brussels, to Germany, to the global markets–is crystal clear: The austerity policies now in place to remedy Europe’s fiscal and economic crises cannot stand up to the test of a democratic vote.

It is sobering. It will be weeks before Italy forms some sort of coalition government; there could be another election in a matter of months. In the meantime, there are two questions hanging over the political proceedings and the debt markets: What will the Italians do? What will happen if they play the anti-austerity card, as last week’s polls suggest they will?

It is a nerve-wracking moment by any measure. Italy is the euro zone’s third-largest economy after Germany and France, as measured by nominal gross domestic product. It has a public debt of more than $2.6 trillion–about 123 percent of GDP. The prospect of a strongly anti-austerity government in Rome now is already rattling the financial markets. It could cost Italy its access to bond investors altogether and throw the European Union’s crisis policies way off course.

But this does not have to end in calamity. The Italian elections also could prove the turning point Europe has been working toward since the Greek election last summer, the Catalonian independence movement in Spain, and many other events too numerous to name. In the best of outcomes Italian voters will prompt Europe to break the mold (as it should be broken).

The markets and a great many people in Brussels and in Berlin, to say nothing of voters in debt-ridden countries, continue to think in an either/or framework: We either have full-on austerity for the ailing economies, nothing else will do, or austerity gets voted out of office and there is no one left to argue for fiscal discipline. This is narrow thinking. It cuts away the middle ground, where a lot of good policy can be made.

What happened in Italy last week illustrates the point.

The key player was Italian Prime Minister Mario Monti. The technocrat who fashioned Italy’s austerity program, Monti was considered a needed friend in Brussels and was a favored by German Chancellor Angela Merkel. It was Monti who saved Italy–and the bond markets–from going over the edge as a consequence of Silvio Berlusconi’s ill-advised policies.

Monti’s four-party coalition got trounced last week, taking just 10.5 percent of the vote. An Italian comedian, Beppe Grillo, and the scandal-a-minute Berlusconi took 55 percent between them. They are both opposed to Monti’s austerity reforms and both see the map of Europe as divided between the harsh disciplinarians in Brussels and Berlin and the nations of the south that are suffering under them.

When he emerged in public late last week Monti pointedly cast himself as the specter of things to come. This will happen to you, too, he said with reference to other European leaders who now favor austerity policies. “There are lags from the moment a good policy measure is implemented and the moment the benefits are visible,” Monti said in a speech on Thursday. “There are big political problems in the understanding by public opinion if these beneficial responses do not materialize.”

It was a moment of high irony. A gifted technocrat with little ties to or understanding of Italian political culture, Monti is a symptom of Europe’s problem. But he also identified the missing link in Europe’s efforts to master its crises. It is not a job for technocrats alone; electorates must be brought in. This has been among the European leadership’s principal failings.

Germany’s president, Joachim Gauck, went straight to this point in a speech delivered at about the same time as Monti’s. If there is going to be “more Europe” in a move toward post-crisis fiscal, economic, and social well-being, it must be developed from the ground up, by way of popular political consent, and not any longer from the top down.

Gauck is a figurehead, as the German constitution provides. But his speech was on the money. “Attractive though Europe is, the European Union leaves too many people feeling powerless and without a voice,” Gauck said. “I hear this and read it on almost a daily basis and can tell you: There are issues in Europe that need clearing up.”
Anyone who finds the thoughts of Monti or Gauck troublesome probably finds the thought of democracy troublesome, too, for that is all they are talking about. But how does Europe get there? How does it advance beyond the either/or of the current conundrum? Is there, indeed, some third way?

Monti and Gauck each suggested one aspect of a new way of thinking about Europe (and economics and fiscal policy and much else). According to Monti, the EU and the sovereign governments within it have to show voters more quickly that their sacrifices are going to come to something other than suffering. Policies, in other words, have to be more transparently beneficial. Technocrats are not given to transparency. That is why we have votes such as Italy’s last week or Greece’s last year.

Gauck offers the very simple idea of bottom-up participation when it comes to policy direction. More people have to have seats at the table than have so far been offered them. Inevitably, such participation will mean the introduction of growth policies and demand management–deficit spending and inflation. To deal with past mistakes, some debt will have to be restructured.

Let none say differently: With unemployment at 15 percent or 20 percent or 25 percent here and there around Europe, inflation is among the more modest of the EU’s worries. But along with these adjustments, voters will have to understand that a measured, agreed-upon standard of austerity is needed to clean up the fiscal house.

“Total gridlock.” “A full-blown political crisis.” “The winner is “ungovernability.” This is the kind of talk one hears in Europe since last week. There are alternatives to the no-hope position; there is a path ahead.

One of Italy’s political possibilities now–and it is no more than that–is that the center-left Democratic Party, which placed first with about a third of the vote. It will form a minority government based on a minimal program of institutional reform and reductions in the current degree of austerity. The party leader, Pier Luigi Bersani, appears to be in the mold of French President François Hollande.

“The bell is also ringing for Europe,” Bersani said last week. It was a reference to the spending cuts and tax rises currently in place across the Continent’s debtor nations. If he turns out to be right–if Italy’s elections turn out to mean what he suggests they mean–the EU could find itself on a more promising, less harrowing course.