Elections Leave Greeks Lacking Coalition, Others Rethinking Austerity

Markets reacted unhappily to the election results, both in Greece and in France, where the Socialist candidate, Francois Hollande, ousted President Nicolas Sarkozy. Hollande too rode to victory on a platform of opposition to tough austerity measures and a promise to promote growth. That position was echoed by Italy, which after the election sent out its own call for growth. "Europe has to give concrete signs that it believes in growth," Industry Minister Corrado Passera of Italy said in the report, adding that there needed to be larger E.U. investments in infrastructure and technology. While Passera also said that Hollande's victory should bring about "concrete facts" on a pro-growth policy for Europe, he added that he did not advocate abandonment of tough fiscal policy.

However, Stefano Fassina, who is responsible for the economic policy line of the center-left PD party, one of the two main parties supporting Prime Minister Mario Monti's government, called for a relaxation of austerity and a delay on accepting new E.U. rules.

He may have some support. When Monti called Hollande to congratulate him on his victory, he said in a statement, "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. For this reason, it is fundamental that Europe urgently adopts concrete policies for growth."

The move away from austerity resulted in a signal from IMF Managing Director Christine Lagarde that more flexibility might be forthcoming from that body. In a Zurich speech she said, "The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment soon."

However, even as she advocated for a means of reducing debt, she said that pitting austerity against growth was a "false debate," and added that countries could come up with ways to achieve both. "We know that fiscal austerity holds back growth and the effects are worse in downturns. So the right pace is essential—and the right pace will be country specific. The right mix between cutting spending and raising revenue is also critical."

She added, "As next year looms on the horizon, countries need to keep a steady hand on the wheel. If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."