Austerity vs. stimulus battle being fought on another front

While Republicans and Demo- crats in Washington face off over whether government austerity or stimulus is the way to respond to a struggling economy, European countries are going their separate ways on the debate. And what happens there could make whatever Washington politicians do academic, If Europe gets it wrong, the result could be a near-global recession before the United States manages to pull out of the great recession of 2008.

Europe is all over the economic map today.

The most dramatic change came in France, where leftist Francois Hollande became the country’s first Socialist president since Francois Mitterrand, who served from 1981 to 1995. Hollande ran on a platform of replacing austerity with stimulus programs and accenting the role of the state in protecting the downtrodden. Nicolas Sarkozy will turn over the reins of government to Hollande May 15, and when he does, the markets will be watching.

They already were this week, and the initial reaction was not encouraging, although, there was more to disquiet investors than Hollande’s election.

While French voters went to the polls Sunday to vote for change, Greek voters were at an impasse. They rejected parties that had imposed the deep spending cuts demanded by Greece’s bailout lenders. The cuts to pensions and social programs are deepening the Greek recession. But no party in Greece has been able to put together a ruling coalition. Meanwhile, over two days of political indecision, the Greek stock market fell by 10 percent.

Markets plunge

The Associated Press reported that markets in Germany and France plunged to near their lowest levels this year during the first two days of this week, and Italy’s was near its lowest since last November.

In Britain Prime Minister David Cameron said his nation must stick to its tough austerity measures, despite doubts elsewhere in Europe. But Britain, which slipped back into a recession last month, saw its main stock index hit its lowest point this year.

None of this was lost on Wall Street, which made a midday correction from a 200 point drop in the Dow Jones industrial average Tuesday, but still ended the day down 76 points and, once again, below the 13,000 mark.

It is going to take discipline on the part of both Hollande and Germany’s Angela Merkel, who spearheaded the cost-cutting treaty designed to save Greece from bankruptcy, to keep the European economy from spiraling out of control.

Obviously there is a limit to how much money a nation can spend — money that it has to borrow — to keep an economy moving and to keep people from rioting in the streets. Just as obviously there is a limit to how much austerity a nation’s economy can absorb without imploding.

It is an uncomfortable feeling for Americans not to be in control of a situation, but that is largely the case today.

President Barack Obama will do what he can to reach out to European leaders in the coming days, hoping that the thorniest issues can wait until next month’s summit of the Group of Eight leading economies at Camp David, Md. That meeting might provide some of the clarity that is missing.