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Gerhard Schröder: Don't strangle Europe with austerity

Europe is churning after anti-austerity elections in Greece and France, where Socialist François Hollande ousted Nicolas Sarkozy. Europe must now shift from pure austerity toward growth. It must also keep working toward closer political union. Both moves will help Germany's economy.

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There are three areas in which European policy must be rerouted. These are the goals of the Nicolas Berggruen Institute’s newly established Council for the Future of Europe, of which I am a founding member:

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First, the direction of European economic and financial policy must change, away from pure austerity toward growth. Greece, Ireland, Portugal, Italy, and Spain have made substantial progress in stabilizing their finances. The economic and political situation in these countries, however, shows that austerity alone is not the way to resolve the crisis. On the contrary, there is a danger of half-strangling national economies with a strict policy of austerity; in Greece this is already happening.

This policy conceals significant dangers. It delegitimizes democratic politics in the nation states that find themselves faced with violent protests and the growth of populist and extremist parties. But this policy is also economically wrong for the whole European Union, because developments in these states affect other export economies. Germany sells more than 60 percent of its exports within the European Union. We would therefore be well advised to cushion harsh austerity measures with programs for growth. For instance, revenues from a tax on financial transactions, which I support, could be used for this.

Second, we need a coordinated program of European structural reform. The international competitiveness of EU states must be strengthened further, because emerging countries like Brazil, Russia, India, and China are catching up – but also because the disparities within the European Union are too large.

Bold structural reform will spur growth and create new jobs. At least, that has been our experience in Germany. With “Agenda 2010” we in Germany pushed through reforms in the welfare system earlier than other European states. Germany has changed within a few years from the “sick man of Europe” to “Europe’s engine” in the view of international observers.

This has been helped by Germany’s unusual economic structure, which is marked by strong industry and many Mittelstand businesses. Other economies such as France, Italy and Spain will now have to follow suit with similar reforms.

And third, I believe Europe must become more strongly politically integrated to overcome the financial crisis for the long term. The current situation makes it clear that you cannot have a common currency area without a common financial, economic, and social policy. We must therefore work to bring about real political union in Europe with further transfer of power from the nation states.

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