May 7, 2012 / 1:26 PM / in 6 years

Southern Europe leaders seek ally in France's Hollande

MADRID/ROME (Reuters) - The election of Francois Hollande in France gives the leaders of struggling southern European countries a new ally in their effort to temper the German-led drive for rigid austerity that has exacerbated their economic woes.

Socialist Hollande’s victory breaks up the centre-right tandem of his predecessor Nicolas Sarkozy and Germany’s Angela Merkel, whose European fiscal pact demanded deep spending cuts in Italy, Spain, Portugal and Greece.

Southern European leaders - including centre-right ones who might have publicly preferred Sarkozy - will cheer the prospect of more time to meet deficit targets and support for proposals such as euro area bonds and coordinated stimulus spending.

In their own election on Sunday, Greek voters abandoned traditional parties from both the left and right that had supported austerity, dealing another hard blow to the Sarkozy-Merkel policies that had become the European consensus.

“The results of the elections in France and Greece impose the need for a reflection on European policies,” Italy’s technocrat Prime Minister Mario Monti said in a statement after speaking with Hollande, Merkel and Britain’s David Cameron.

“Responsible public finance policy is a necessary but certainly not sufficient condition for the key objective: a sustainable growth which can create jobs and produce social equity,” he said. “For this reason, it is fundamental that Europe urgently adopts concrete policies for growth.”

The north-south divide could prove a more compelling force in southern Europe than traditional left-right politics. Spain’s centre-right Prime Minister Mariano Rajoy might have been expected to prefer fellow conservative Sarkozy, but nonetheless stands to gain from the election of a Socialist in Paris.

“Rajoy won the lottery yesterday, in a way. Economically we’re living week to week, so if there can be a certain relaxation of spending cuts it would be great for him and for Portugal,” said Narciso Michavila, president of GAD3 consulting and research firm in Madrid.

One member of parliament from Rajoy’s People’s Party told Reuters on condition of anonymity that the French Socialist’s victory spelled relief for Spain.

Miguel Murado, an independent analyst in Madrid, called it an “irony” that Spain’s conservative leaders would be secretly greeting the success of a Socialist in France.

“The reason for that is obvious: it is expected to help Spain convince all the countries that maybe the adjustment in the budget and deficit should not be that quick,” he said, although he cautioned that a backlash against the centre-right across Europe could leave Rajoy isolated at the start of his four-year term.

Members of Italy’s centre right also appeared ready to cross the ideological spectrum to embrace Hollande. The Italian conservatives have sought euro bonds - debt issued for the whole euro zone and implicitly guaranteed by countries such as Germany - and were at odds with Sarkozy and Merkel.

“I think there’s more chance that Italy can play a role in rebalancing austerity policies towards growth and development,” former Foreign Minister Franco Frattini said in an interview with Corriere della Sera newspaper.

“Germany cannot continue to rule out eurobonds and excluding investment spending from national deficit calculations,” he said.

SELF-DEFEATING

Youth unemployment across much of southern Europe is more than 50 percent and public anger is growing at extreme austerity measures such as in Spain, where the central and regional governments are cutting 40 billion in spending this year and also raising taxes.

Increasingly, leaders - and voters - in southern Europe are listening to the arguments of economists who say deficit targets can be self-defeating, because austerity can deepen recession, hurting the public finances that the targets are meant to fix.

Monti has faced mounting opposition in Italy at the tax hikes and other measures he has passed to control Italy’s 1.9 trillion euro public debt. Lately, he has placed increasing emphasis on encouraging growth.

In Portugal, undergoing its worst recession since the 1970s, the centre-right government of Pedro Passos Coelho has been adamant in sticking to strict austerity under a 78-billion-euro bailout and says this is its overriding priority.

Hollande is expected to be pragmatic and adhere to the European Union policy on fiscal stability, but he has also pushed a tax-and-spend agenda and is not expected to team up as closely as Sarkozy did with Merkel in demanding austerity from rescued countries like Portugal and Greece.

Italy and Spain have avoided bailouts so far, but both alarmed bond markets this year by announcing they will need more time to meet deficit targets.

“I think this is very important in rebalancing Europe. Europe is too focused on austerity measures which just kills growth and stops countries not only from growing but from paying back our debts because of the lack of growth. This will all be dumped on the shoulders of young people,” said Rome resident Mauro Beschi after the Hollande election result.

Additional reporting by Lisa Jucca, Rom Slotuno and Eleanor Biles in Italy and Axel Bugge in Portugal; Editing by Peter Graff

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