Europe Faces Anti-Austerity Mutiny as Crisis Looms

The running theme at the meeting of European Union leaders in Milan last week was, “The toolbox is empty. Nobody knows what to do next to get Europe’s economies out of the ditch.”

News reports from Milan correspondents told a different story. Quite a lot was done, and it is potentially big stuff.

First, standing again on the cliff overlooking Recession Valley now prompts a fundamental realignment among the European powers. When François Hollande and Matteo Renzi, the leftist leaders of France and Italy, make common cause against Germany and the E.U.’s budgetmeisters in Brussels, it looks awfully like the start of a potentially widespread revolt among the worst hit nations in the eurozone.

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Second, Paris and Rome are openly challenging the neoliberal economic ethos that has led the Continent down the road to ruin via austerity policies shaped in the image of the Bundesbank and Germany’s fiscal fundamentalists. As of the Milan gathering, the European Central Bank now joins them in calling for growth policies, not fiscal rigidity. This could become a free-for-all, for it is an argument Europeans urgently need to have.

The prospect of realignment. The Franco-German entente celebrated since Valery Giscard d’Estaing and Helmut Schmidt cemented it in 1980 is intact—a fulcrum of Western Europe. But France is a nation of mixed sensibilities, northern and Mediterranean, as Camus famously dissected it in the late-1930s. And Germans speak only to part of the French psyche, not all of it. As a French friend once told me, “To know us, know we are a Latin people.”

This suggests a couple of things. One, with culture and shared traditions behind it, a new alliance between the French and Italians could have staying power. It could, indeed, prove appealing to Greeks, Spaniards, and the Portuguese, depending on the political hue of their governments, and so evolve into an effective bloc in the E.U. to rival the Northern nations’ power.

One very big reason the E.U. is in crisis is because policies shaped by fiscally conservative technocrats up north reflect neither the interests nor the will of the southern rim democracies. In short, without more buy-in the European project is fated to remain what it is now, sadly—unbalanced, unstable, and dysfunctional. Everybody loses—not least investors these days.

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Latin and Mediterranean nations share long social-democratic traditions.Europe’s social democrats have been on their back feet, if not their backs, since the neoliberals’ triumph in the post-Berlin Wall years. For now, it is a question, but a good one no matter what your stripe: Do Paris and Rome propose to renovate the welfare state’s philosophic core—and then reach across to Schmidt’s social-democratic heirs in Germany?

This brings us to the second interesting aspect of the Milan talkfest. It should now be clear to anyone not wearing ideological lenses that austerity policies, enforced as if read from a manual without reference to actual conditions, have done vastly more damage than good in Europe over the past half-dozen years. The word no longer to be avoided is “failure.”

Europeans should start using it. As any student of history can discern, defeat is the mulch wherein societies reconstitute themselves. Germany, for goodness’ sake, is Exhibit A. It is essential, thus, to hold the austerity strategy up to the light and insist the neoliberals’ failure be called what it is: We learn from defeats and error; when these are not admitted corrections are precluded.

If I read the Germans accurately, Chancellor Merkel is not to be blamed as the Nurse Ratched of the Euro crisis. All in, she has performed as a good European, cautiously hinting just two weeks ago that it’s now clear the Continent needs Keynesian stimulus of one or another kind more than German fiscal rectitude.

Related: Merkel Urges EU to Keep Up Reforms as Crisis Not Over

Equally, Mario “Whatever It Takes” Draghi, the ECB president, also signals now that he sees the need for change. This is not altogether surprising, given Draghi is Italian. Earlier this month he announced a $1 trillion investment in new stimulus programs. In a lighter moment in Milan, he coyly challenged correspondents to guess which nation ought to get off the austerity bus.

The guilty parties in the reckless prosecution of austerity are two. One, technocrats in Brussels and Frankfurt have too much power over policy and too little political exposure—a dangerous combination, as is now evident. Two, there is Merkel’s domestic constituency, heavily weighted with severe budget-balancers petrified of inflation.

In this, Merkel’s problem—and Europe’s—is similar to Benjamin Netanyahu’s in Israel, where his coalition depends on tiny, extreme-orthodox parties.

Fundamentalists are one thing in a domestic context. When they emerge with decisive influence in the international context, the leader trying to make sense of a bigger picture has his or her hands full.

Hollande and Renzi appear to be on the brink of the answer. They have 2015 budgets to tote up, and they know meeting the E.U.’s mandated targets—a budget ceiling of 3 percent of GDP, government debt no more than 60 percent—spells more ruination. They should push hard for immediate exceptions and then insist on negotiating a rules revision.

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Failing this, they should break the rules.

The E.U. has potential greatness in it—a project in the cause of advancing not just Europe but humanity. But institutions, like markets, are to serve people, not the other way around. If it’s a choice between E.U. rules and the welfare of ailing societies, the choice ought to be obvious to all: The rules are what must be sacrificed.