05/09/2012 12:39 pm ET Updated Jul 09, 2012

Europe's Post-Merkozy Gridlock

There's no sign that Europe's most debt-burdened, no-growth, high-unemployment economies are recovering. The austerity measures that they, above all Greece, accepted in exchange for loans from the EU have brought misery to their citizens, but without producing gains that would have made the pain (cuts in budgets and wages, massive joblessness) seem like a severe but worthwhile sacrifice. So the belt-tightening has begotten a backlash -- exemplified most recently by the elections in Greece and France -- and it's likely to get bigger.

To get a sense of the magnitude of Europe's problems, consider some numbers. In March 2012, 17.4 million people of working age were jobless in the 17-country Eurozone, and the unemployment rate was 10.9 percent.

Even these dismal numbers don't depict the depth of the crisis. That becomes clearer if you divide the Euro area into countries that have fared well (Germany, Austria, and Luxembourg, where the unemployment rate ranged between 4 percent to 5.6 percent) and those that have failed. The latter include Spain with a 21.7 percent unemployment rate at the end of 2011, Greece with 17.8 percent, Ireland -- once the much-celebrated Celtic Tiger -- with 14.4 percent, and Portugal with 12.9 percent.

Their predicament looks even grimmer if you consider working-age youth. In Spain and Greece, almost half lack jobs, in Portugal over a third, in Ireland almost 31 percent. And 2012 has not brought better tidings. (You think we have problems?)

This is the context of rising popular resistance to the tough guidelines that the EU adopted for aiding debt-ridden countries. The rules require governments seeking support from the European Financial Stability Facility to slash budget deficits and public debt to prescribed levels. This remedy reflected the mood in Germany. Having already spent 1.3 trillion euros to reintegrate the former East Germany, German taxpayers were not inclined to help Eurozone states such as Greece, which they deemed guilty of profligacy and economic mismanagement, unless the borrowers ingested the bitter brew of austerity.

This strategy presumed that the leaders of such countries could convince voters that the unpalatable potion would make their economies healthy and that the voters would bear patiently the pain produced by spending cuts and layoffs. But people in the most economically troubled countries -- and not just there, as witness last week's French presidential election -- are rejecting the pain-then-gain prescription that leaders in Germany and the other healthy economies produced and that the tandem of Chancellor Angela Merkel and President Nicolas Sarkozy, soon dubbed "Merkozy," pushed through.

In Greece's parliamentary election, the two major parties -- New Democracy and the Socialists -- took a drubbing and seem unable to create a coalition without the leftist and rightist parties that rode the anti-austerity wave. So it's not clear who will govern Greece, which must soon make another round of big cuts to get the additional EU funds it needs to pay bondholders, who, having already been strong-armed into taking big "haircuts," are not disposed to be sympathetic.

Then there's the latest political shift in France. The socialist president-elect Francois Hollande unseated Sarkozy by promising voters that he would cease the budget cuts and renegotiate the Merkozy deal so that France and other Eurozone states would gain leeway to simulate their economies through government spending.

But Merkel has already rejected this idea, and Hollande cannot act alone without increasing the rates bond markets would demand from France. While the anti-austerity stance is gaining support from other European leaders, such as Italian Prime Minister Mario Monti, the momentum is still insufficient to sway Merkel, who's exquisitely aware of the mood of German voters.

Yet absent a Eurozone consensus on a new approach, its most troubled economies lack good choices. Greece could abandon the Euro, renege on its debt, and regain the freedom to devalue its currency to boost exports. But that is a drastic step -- and one with uncertain payoffs.

The problems Hollande faces pale in comparison to those awaiting Greece's next government. Still, Hollande has raised French expectations for a fresh start involving growth minus the pain produced by big budget cuts. But he can't succeed through unilateral action, not least because states that adopt the Euro forfeit standard macroeconomic tools used for economic stimulus. Hollande needs a new EU pact but has little leverage.

The current gridlock is not just the continent's problem. Europe is a big market for American exports -- 22.5 percent of the total in 2010, or $412 billion -- so its malaise and the decline in U.S. exports have made it harder for the President Obama to reduce American unemployment, which he must do to keep his job.

China's economic growth, while still the envy of the world, has slowed, and since China depends more on exports for economic growth and jobs than the U.S. does, it too is nervous about the EU's crisis. The bloc accounted for just under 19 percent of Chinese total exports ($356 billion) in 2011.

Germany can refuse to budge on austerity, but for how long if its remedies don't cure Europe's ailing economies? After all, the EU buys 63 percent of German exports, and Germany's economic success has been enabled by the very European countries Berlin now castigates for being spendthrifts. Moreover, Greece, Portugal, Ireland, and Spain together owe German banks 318 billion euros. So Merkel, too, faces a tough job. She must figure out what to do if austerity doesn't work and may then have to convince German voters that it is in their long-term interest to support a kinder approach toward fellow EU members in distress.

The Merkozy consensus has collapsed, and there's no telling now what, if anything, will replace it. What is clear -- Hollande's sweeping anti-austerity pledges notwithstanding -- is that no European leader has yet offered a substantive alternative or demonstrated the capacity to forge a new continental compact that will suit both debtors and creditors.

As for the non-European states that are vulnerable to the Eurozone's economic calamity, their lot is to wait and watch -- and hope.