NZ Herald business editor at large

Liam Dann: We're back to life on the edge

President-elect Francois Hollande. Photo / AP
President-elect Francois Hollande. Photo / AP

Welcome to the austerity revolt - the democratic flaw in the European Union's tough love solution to the sovereign debt crisis.

First the Dutch Parliament collapsed, now we have a Socialist President in France. In Greece, the elections at the weekend proved not even the Socialists are safe if they adhere too closely to the script written by the German Chancellor, Angela Merkel, and her budget-slashing supporters.

Some trillion euros of bailout money has been promised to shore up Europe's weakest nations - and to protect credit markets and banks - on the condition that budgets are cut and books are balanced in all the right places.

What this political rebellion means for Merkel and her grand plan to save Europe isn't yet clear, but what is clear is that these speed wobbles will spook the markets.

Market confidence in the finely balanced "bailout for budget cuts" plan was already shaky.

But at least it was something to cling to. It has provided some stability to build on for the past few months.

The trouble is that austerity measures tend to cause more pain in an economy, in the short term at least.

Cutting off government stimulus when little else is firing only adds to unemployment and can cause nations to slip back into recession, as has happened in Britain.

It's hard to escape the reality that books do need balancing. Western democracies can't keep living indefinitely on credit - at least not if they expect to maintain the kind of freedoms and standard of living to which they are accustomed. But how to get there is one of the most hotly debated issues in economics.

Government spending is a good way to jump-start an economy, but if you are as broke as the Greeks it might be a luxury you can't afford.

Perhaps the French can afford it, but the departure of Nicolas Sarkozy is a big blow to Northern European solidarity on the issue.

Markets will be on edge in coming days as Greek leaders try to form a minority government and the left-wing resolve of French President Francois Hollande is tested.

As usual it will make great drama but the risks that this further dampens global demand for commodity prices are very real. That could mean less cash flowing into our economy and a longer, slower recovery.

And that would make life even more difficult for the National Government as they forge on with their austerity-lite policies.

* Debate on this issue is now closed.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

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