Italy vote arms critics of Berlin's austerity mantra

Austerity opponents from Athens to Paris say Italy's election stalemate is proof that Europe's voters have had enough of the painful spending cuts that Germany and its northern allies prescribe for their less fortunate neighbors.

While the outcome will not persuade Germany to abandon its demands for budgetary rigor altogether, it makes it more likely debt-laden euro zone states will receive some leniency from Berlin, paymaster of the European Union, as long as they show real efforts on reform.

Early beneficiaries of that indulgence will be France, which in coming weeks expects to win a year's grace from the European Union to achieve deficit targets, and Cyprus, which Berlin now acknowledges must be offered an aid package next month.

"THE SOUTH IS COMING," Panos Kammenos, head of the fiercely anti-austerity and anti-German Independent Greeks party tweeted in response to the Italian election, which he saw as a backlash against the rigor imposed on southern states such as Greece, Portugal and Spain.

While the poll deadlock in Rome owes much to Italy's chaotic politics, it showed a huge popular protest against austerity measures and underlined the north-south split dividing Europe into debt sinners and self-appointed fiscal disciplinarians.

Stirring up animosities dating back to World War Two, the debt crisis has turned Angela Merkel, the unassuming daughter of an East German pastor, into Europe's most divisive leader since Britain's Tony Blair split the continent in two by backing the 2003 U.S.-led Iraq war.

Lampooned in banners on Irish soccer terraces and in Spanish and Greek cartoons, Merkel has become the embodiment of austerity and is among the tiny band of European politicians who stir genuine passions across the continent.

"Mrs Merkel cannot lead Europe alone," France's left-wing Industry Minister Arnaud Montebourg said this week in a rare breach of French policy not to criticize the conservative German leader in public.


French Finance Minister Pierre Moscovici, more senior to Montebourg in the government, declined to join such attacks in an interview for the Reuters Euro Zone Summit this week.

But he stated: "The message from Italy is: 'Be careful, when you are in a situation in which you ask populations to make sacrifices for long periods ... There needs to be another perspective - which is 'growth again'."

While Paris accepts that the might of the German economy has thrust Berlin into a crisis leadership role, officials complain in private that Germany has yet to work out how it can perform that role without raising the hackles of others.

German opposition chancellor candidate Peer Steinbrueck found himself on the wrong side of that dilemma on Wednesday - and in the process talked himself out of dinner with Italy's president - by describing ex-premier Silvio Berlusconi and comic-turned-politician Beppe Grillo, who both scored well in the election thanks to protest voters, as "clowns".

German leaders bristle at the accusation they are trying to browbeat Europe into their mould, with President Joachim Gauck - the largely ceremonial head of state - insisting last week that Berlin did not want to rule the continent by "German diktat".

"We don't want to intimidate others, nor force our ideas upon them. But we do stand by our experiences and want to share them," Gauck said in a speech, noting Germany's economy had been written off as unreformable less than a decade ago.

The hands of Merkel and Steinbrueck are tied; neither can expect to win a September election if they relent too much on a path of budgetary rigor that is as popular with German voters as it is poisonous to electorates in southern Europe.

But Germany's austerity push is not as monolithic as many opponents would have it.


Berlin already agreed last year to give Spain and Greece more time to seek budget cuts and, in a move intended as an attempt to boost growth and help the competitive edge of other euro economies, has let its domestic wage levels tick higher.

Finance Minister Wolfgang Schaeuble told the Reuters summit that stable finances remained a condition for growth, and warned against a repetition of the joint Franco-German push a decade ago to water down EU budget rules.

But he also showed a conciliatory line on France's admission last week that it will miss a 2013 deficit target of 3 percent of output.

"France is not saying it will flout the rules," he told the Stuttgarter Zeitung newspaper, adding it was time to look with the European Commission at what the admission meant for the EU stability pact governing deficit targets.

That gels with the Commission view that a postponement of deficit targets for countries on the brink of recession is possible if they are trying their hardest to secure reform.

Even the Netherlands, which for years played hardball on the need for southern countries to accept budget cuts, may now fall into that category after conceding on Thursday it will miss its own deficit target this year.

But European Commission President Jose Manuel Barroso rejected the idea that the Italian vote would mean countries around the zone simply being let off the hook.

"We never said it would be easy ... But I insist for this kind of policy we need leadership, democratic leadership that has the courage to resist short-term considerations and the capability to explain to the public what is at stake," he told Reuters.

As always with politics, form is as important as substance.

Clemens Fuest, incoming president of Germany's ZEW centre for economic research, said that for Europe's leaders to keep selling austerity policies to their voters, they must also convince them they have a plan to kickstart the region's economies by highlighting efforts to prop up banks and private investors.

"They have to come up with a credible story that will tell voters there is some silver lining on the horizon," Fuest said. "There has to be some sort of growth story."

That is something on which, according to a conservative ally of Merkel, the German leader is already reflecting.

"If the economic situation in southern Europe gets worse, if unemployment continues to rise, that doesn't help her," said the ally, who requested anonymity.

"She wants to see growth. She has no interest in being seen as the source of the pain."

(Additional reporting by Reuters Euro Summit team; Nicholas Vinocur in Paris; Noah Barkin in Berlin; Deepa Babington in Athens; Fiona Ortiz and Manuel Maria Ruiz in Madrid; Padraic Halpin and Conor Humphries in Dublin; Gilbert Kreijger in Amsterdam; Editing by Will Waterman)