Europe’s Anti-Austerity Duo

Among the many consequences of Europe’s years-long economic crisis is the hardening of the eurozone into two camps: a pro-austerity side, led by Angela Merkel of Germany and, under Nicolas Sarkozy, France; and a pro-stimulus side, which comprises pretty much everyone else.

The crisis continues, but the days of Franco-German neoliberal dominance (known around Europe as “Merkozy”) are gone. Not only is Mr. Sarkozy no longer president, but the Continent’s weak recovery has raised questions about the wisdom of Berlin-centric austerity. Outside Germany, many have been missing an anti-Berlin leader.

Suddenly, there are two candidates for that role: Prime Minister Manuel Valls of France and Prime Minister Matteo Renzi of Italy. They are both young and telegenic, and have positioned themselves against the Berlin consensus. Because Europeans love silly wordplay, the pair have been called, in The Economist and elsewhere, “Vallenzi.”

These young leaders are at the helm of the second- and third-largest economies in the eurozone, and their performance could determine whether critics are right that the region is headed for a Japanese-style era of deflation and stagnation. But while the European media have focused on their similarities, what is more interesting is their differences — and whether those differences will prevent them from mapping a new path forward for the Continent.

Mr. Valls and Mr. Renzi seem predestined to make a powerful political couple. They lead two of the most sclerotic economies in the European Union. They are both nominally left-wing premiers who seem to be inspired by Tony Blair’s modernization of social democratic policy making in Britain. They have risen arguing for domestic structural reform, paired with more economic stimulus at the supra-national level. They argue for growth ahead of redistribution. They are also technically unelected, having been appointed by a president (Mr. Valls) and by the largest party in Parliament (Mr. Renzi).

But their differences are more important. Where Mr. Renzi is pragmatic, accommodating and willing to take risks at home, Mr. Valls is cautious and ideological.

Take their divergent approaches to their budgets, which have to receive approval from the European Commission. Mr. Renzi’s first principle has been to show that he and his government can be good fiscal stewards at home, believing that only by establishing his budget bona fides can he push for concessions on more European Union-level stimulus.

But he also framed his approach in rhetoric about a New Deal for Europe, a grand bargain in which countries like Italy would make reforms at home in exchange for help from abroad. He even gave his message a populist tinge: “Italy respects the rules, but not the approach where 0.1 percent matters more than politics.” It is a challenge to Berlin, but one that Ms. Merkel might find hard to resist.

The contrast with France is stark: Mr. Valls’s government chose to ignore previous budgetary requirements, saying it had already done whatever was possible. “To try and do more would be impossible,” Mr. Valls stated laconically. The commission wasn’t convinced, and it criticized his government for having “not taken effective action for 2014 at this stage.”

The domestic contexts in Italy and France also make coordination between the two much more difficult than it was between Ms. Merkel and Mr. Sarkozy. Mr. Valls serves under François Hollande, the most unpopular French president of the Fifth Republic, and the young prime minister is handicapped by woeful economic problems that Mr. Hollande’s far-reaching presidential powers and old-left policies have only deepened.

Mr. Renzi does not have an unpopular president to answer to. In his short months in office, he has transformed the Italian political scene, crushing dissent within his party and then finding common ground with the Italian left’s worst nightmare, Silvio Berlusconi. Unlike Mr. Valls, Mr. Renzi has already delivered some of his promised reforms. He has enacted meaningful tax cuts for companies, curbed social-welfare contributions and begun a labor reform process that strikes at Italy’s notorious anti-layoff rule. Italy is also moving to ease the almost mythological paralysis of its political and judicial system.

When unions quickly derided Mr. Renzi as “Thatcherite,” he struck back, accusing them of defending ideology over people. This is the kind of attitude we have not heard from Mr. Valls.

“Vallenzi” is a chimera; Mr. Renzi is proving to be the much better politician. But politics isn’t a sport. Neither Italy nor France is, alone, strong enough to challenge the Berlin consensus and define a new path toward sustained economic recovery. If they can’t come together, then they risk not only allowing Berlin to continue to push its austerity strategy, but also enabling the continued resurgence of populist, nationalist parties across the Continent.

Obviously, Mr. Valls needs to get better at daring politics. But both leaders could do more to work together, making common cause in negotiations with Germany and the European Commission. If Mr. Valls and Mr. Renzi managed to substantially reform the labor market and welfare system, their countries would return to growth, be in a better position to shape common European Union rules and put pressure on those urging them to go down this path to adhere to the rules themselves.

Until then, Ms. Merkel stands alone — powerful, uncontested and not ready to listen to voices from outside Europe’s austerity echo chamber.

Karl-Theodor zu Guttenberg, the chairman of Spitzberg Partners, was the economics minister of Germany in 2009. Pierpaolo Barbieri, the executive director of Greenmantle, a macroeconomic-advisory firm, is the author of the forthcoming Hitler’s Shadow Empire.

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