It's early days, but powerful political currents could be sweeping Europe away from its hair-shirt obsession with reducing debt and deficits regardless of the economic cost. Any course correction will be a tug on the tiller rather than a U-turn.
The euro zone will not suddenly abandon budget discipline and spend its way back to growth as Germany, Europe's paymaster, would not stand for it. Nor, in their current mood, would the bond markets. But one three-pronged strategy under discussion, according to economists and academics, would give governments more time to lower their budget deficits to the mandated threshold of 3 percent of national output in return for a demonstrated commitment to far-reaching reforms that improve growth over the medium term.
At the same time, more funds would be mobilised from the European Union budget and the European Investment Bank to finance infrastructure and other development schemes, boosting the euro area's chronically weak demand. If all went well, the vicious circle of contracting output triggering ever more growth-sapping budget cuts to meet self-imposed deficit reduction targets would be broken.
Andre Sapir, a scholar at Bruegel, an influential think tank in Brussels, believes a political commitment to a deal along these lines, if not agreement on a detailed package, could crystallise in time for the next meeting of EU leaders in June.
"We are headed for a June summit where there will be a growth initiative of some sort," Sapir said.
Pressure on Europe to take it easier on fiscal retrenchment has been growing. The impeccably orthodox International Monetary Fund and the Organisation for Economic Co-operation and Development have both warned of the economic dangers of over-rapid budget cuts. But international institutions do not vote. It's the ballot box that is transforming the debate.
On Sunday, candidates broadly opposed to the EU won almost 30 percent of votes in the first round of France's presidential election. Socialist candidate Francois Hollande, who has promised to add a pro-growth dimension to the EU's fiscal discipline treaty, is favourite to beat incumbent Nicolas Sarkozy in the second round on May 6.
Greeks elect a new parliament on the same day and opinion polls suggest that, as in France, fringe parties will do well because of popular fatigue with austerity.
Sapir said the challenge for mainstream politicians was to craft a package that switches the focus from short-term austerity to medium-term sustainability of public finances.
Winning the agreement of Germany and other discipline-minded countries to allow more time for deficit reduction would be difficult. But Sapir saw scope for a trade-off if free-spending governments were making reforms to tackle labour market rigidities and critical budget problems related to ageing, notably spending on pensions and health care.
There are already signs of a marginal shift in official thinking in this direction, according to Riccardo Barbieri, chief European economist at Mizuho in London.
The European Commission softened Spain's 2012 deficit reduction target after Madrid brusquely rejected its initial proposal as too demanding. For its part, Italy is postponing its goal for achieving a balanced headline budget - presumably with the blessing of the Commission, the EU's executive arm, which is due to rule soon on the viability of each member country's plans.
Barbieri would go further and allow governments in budget planning to use more optimistic forecasts of their countries' economic growth potential if they can show convincingly that they are making fundamental changes to how their economies work.
"Personally, I would hope to see a change in the fiscal approach," he said. "I would favour a more explicit policy that combines in an intelligent way deficit reduction goals with structural reforms."
Watering down the euro zone's new fiscal compact would be difficult for German Chancellor Angela Merkel to accept.
But the collapse of the Dutch coalition government after it failed to win enough support for budget cuts was likely to make an impression on fellow fiscal hawks, said Malcolm Barr, an economist with J. P Morgan in London.
As a result, Germany and the European Central Bank would probably tolerate some slippage in near-term fiscal targets in return for a programme of structural reforms and acceptance of the fiscal compact's medium-term rules, Barr said in a note.
Such reforms are all well and good; they are indispensable for reversing the divergence in economic performance within the euro zone that has brought the single currency close to collapse.
But Philip Whyte, a senior research fellow at the Centre for European Reform, a London think-tank, is sceptical that the euro zone can regain the path of growth unless it corrects what he sees as fatal flaws in the design of the single currency.
In the absence of a fiscal union similar to that in the United States, heavily indebted euro zone members such as Spain and Italy are vulnerable to sudden stops in private-sector capital flows, robbing them of policy autonomy, Whyte argued.
"The euro zone would still be working as an austerity machine without the fiscal compact because flaws in the structure force countries to pursue self-defeating economic policies," he said.
George Magnus, senior economic adviser to UBS in London, agreed that fiscal integration was necessary to put the euro zone on a stable footing; the other requirements were pan-European banking supervision and a recovery of competitiveness by the euro zone periphery to drive growth.
Crucial in this last respect, Magnus said, would be the recognition by Germany that it must tolerate higher inflation to help its southern neighbours narrow differentials in real costs without driving their economies into a deep recession.
Would Germany, with its loathing of inflation, ever sign up for such a programme? In the course of the euro zone debt and banking crisis, Berlin has drawn red lines more than once, only to cross them in extremis.
But even if Hollande wins the French presidency and follows a growth agenda that attracts broad support from the euro zone periphery, Magnus said Germany would have great difficulty yielding power in the three areas he identified as critical.
"The spectre of a euro break-up fills most people with dread, so it is assumed the Germans will ultimately do whatever they have to do in order to keep the euro together. But this is beginning to test the limits of realpolitik in a serious way," Magnus said.
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