Is Europe witnessing 'the end of the dogma of austerity'?

When history looks back at the debt crisis gripping Europe, the faces of angry protesters in Southern Europe railing against Berlin-mandated austerity will be a defining image.

But what will be the picture of turning point? Will it be captured in the spring of 2013?

French Finance Minister Pierre Moscovici seems to think so: This week he stated it plainly on the radio: “We’re witnessing the end of the dogma of austerity.”

His declaration adds to a crescendo of bold – and almost pleading – statements from leaders who sense a policy shift under way in Brussels.

Brussels – with powerhouse economy Germany driving the debate – has prescribed budget-cutting policies intended to get Europe’s crisis under control. But in the past few weeks alone, countries have been given more time to reduce their EU-mandated budget deficits; the European Commission has shifted, albeit subtly, its discourse on austerity; and record high unemployment statistics, flawed research, and unstable politics across the Continent have given increased credence to the notion that what has been tried until now is simply not working.

A new path?

Many say the shift in Brussels is more rhetorical than anything else, because legal frameworks, markets, and power centers like Berlin don’t allow for or want an alternative, one that is far more complicated than just growth vs. austerity.

Still, the kind of talk being heard now would have been unthinkable in 2010 and 2011, or even a year ago, says Vivien Pertusot, head of the Brussels office for the French Institute of International Relations.

“We are not going to have a complete overhaul,” he says. “But it’s been so difficult to get even that shift to happen, it feels like the beginning of a new chapter."

The winds noticeably changed in April, when European Commission President Jose Manuel Barroso made global news at a conference by saying austerity itself could not work alone, though this idea had been floated quietly months earlier.

"While I think this policy is fundamentally right, I think it has reached its limits," he said. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

Two weeks later, the European Commission gave France and others two more years to get their budgets below the EU-mandated 3 percent of GDP due to low growth prospects for 2013, leading to Mr. Moscovici’s comments on Europe 1 Radio: "Austerity is over, but we remain serious,” he also said.

'A change in emphasis'

Within the European district of Brussels, inside the glass-paneled buildings that house seats of law and policy making for the 27-member European Union, no one is furiously rewriting the rules. “There is not a full shift in the debate on austerity, there is a change in emphasis,” says Guntram Wolff, the acting director of the Brussels think tank Bruegel who previously worked at the European Commission.

There could be no U-turn, he says, because of the clear legal framework put in place by the EU, and the "fiscal compact" countries agreed upon to keep deficits under 3 percent of output, the nature of monetary unions, and simple market pressures.

And few observers sense a turning point in Berlin or the northern European countries that support German Chancellor Angela Merkel's steady course, especially until Germany’s crucial elections in September.

But a new path could be forged if continuing dour economic news and growing questions in academic circles and institutions including the IMF persist. In April, EU statistics showed the unemployment for the eurozone rose to a record 12.1 percent, with youth unemployment above 50 percent in Spain alone.

At the same time, flaws were highlighted in research by economists Kenneth Rogoff and Carmen Reinhart showing that growth slows significantly with public debt above 90 percent, which was used as a basis for austerity policies in 2010.

Growing disillusionment

All of this has raised the volume of critics opposed to austerity policies. Italy’s new prime minister, Enrico Letta, said upon assuming his post recently: "Italy is dying from austerity alone.”

Mr. Letta is speaking to a growing electorate disillusioned by the European Union project. According to Eurobarometer, the percentage of Italians who distrust the EU rose from 28 percent in 2007 to 53 percent five years later. In Spain, where austerity measures are some of the harshest, distrust rose even more spectacularly, from 23 percent to 72 percent in 2012, which is higher than the rate of 69 percent in the UK, which is debating whether it even wants to be in the EU.

Pieter Lagrou, a contemporary European history professor at Free University of Brussels, says that increasingly residents see the EU as a nameless, faceless entity that does not respond to what the citizenry really needs or is asking for.

He agrees with most in Brussels that the debate on austerity is one of words, not actions. But while some may be relieved by that – worried that countries will ditch reforms they desperately need – he among others worries about the long-term threat to people’s faith in parliamentary democracy.

In Italy – where a government just formed after more than two months of deadlock that followed unexpectedly anti-European elections – senior politicians said yesterday that Europe risked becoming a “nightmare” of austerity, with xenophobia and radical populist parties with ever greater sway in the politics of the continent.

'Not one size fits all'

Many countries blame Germany for this. But Constanze Stelzenmüller, a senior fellow with the German Marshall Fund of the United States in Berlin, says that to frame the debate as austerity vs. growth or north vs. south, is reductionist.

"The German position is much more complex," she says. Germany has made many concessions, for example, by agreeing to let the European Central Bank be the lender of last resort, by signaling that it is willing to address its current account imbalance by boosting domestic consumption, and more recently by giving the Economic Commission the nod to allow more time for countries to reach deficit targets.

Plus, she says, “Germany has said it’s not just about austerity, it’s about structural reforms such as labor market liberalizations,” some of which could ultimately boost a civil society that’s been held back by dysfunctional political systems.

Germany, has not, she says, demanded that everyone be like Germany. “It’s not one size fits all.”