The mild features of Herman Van Rompuy took on a stern cast on Thursday when he addressed business leaders in Brussels on Europe’s fight to overcome its economic and financial crisis.

In less than a week, political upsets in France and the Netherlands had shaken up the debate about how Europe should dig itself out of its hole. Across the 27-nation EU, public discussions intensified about whether governments and central bankers should emphasise economic growth at least as much as wrenching structural reforms, speedy deficit reduction and morale-sapping austerity.

Mr Van Rompuy, the professorial former Belgian prime minister who heads the European Council, which groups EU heads of government, yielded very little. In language reminiscent of Angela Merkel, Germany’s chancellor and Europe’s champion of fiscal rectitude, Mr Van Rompuy said: “We must tell the truth. There are no magic formulas. Reform takes time and so does the impact on growth and jobs …Some people these days are creating the illusion that a pro-growth policy is easy. This is not the case.”

The message deserved attention beyond Europe’s borders. From the US and Canada to China and Japan, the health of the world economy and the stability of its financial system are tied partly to Europe’s fate, just as they were when the sovereign debt crisis first rocked the eurozone two years ago. Whether Europe continues to swallow its German-manufactured austerity pills or mixes them with a dose of growth-boosting measures is a matter of global significance. What changed this week was that the prospect emerged, for the first time in the crisis, that a crop of forthcoming national elections – in France, Greece and the Netherlands – might challenge the course adopted so far.

Largely at the behest of Germany, that approach has involved restoring order promptly to public finances, abiding by strict budget rules enforced by EU authorities and introducing reforms intended to improve competitiveness in the long run – even if they drive up unemployment and cut living standards beforehand.

One sign that policy makers are working on a growth initiative in time for a June summit of EU leaders came on Wednesday when Mario Draghi, the European Central Bank president, said Europe needed a “growth compact” to complement its recently approved treaty on fiscal discipline. Just a day later, Mr Van Rompuy suggested he might call an emergency meeting of heads of government within the month to discuss growth.

But the room for fiscal manoeuvre of most EU governments is limited. According to data this week from Eurostat, the EU’s statistical agency, the public debt of the eurozone’s 17 governments rose last year to 87.2 per cent of gross domestic product, the highest since the euro’s launch in 1999. Any growth initiative is therefore highly unlikely to resemble the deficit-generated demand policies that characterised Europe in times of stress for much of the post-1945 era. As Mario Monti, Italy’s prime minister, put it on Thursday, this would be “an illusory shortcut to growth”.

More likely is a carefully designed effort to expand cross-border investment, in areas such as infrastructure and advanced technologies, with the help of the private sector and public entities such as the European Investment Bank.

A powerful factor shaping the debate is the consensus on how to save the euro that emerged, after the outbreak of the debt crisis, among bureaucratic elites and political leaders in Brussels and EU national capitals. For the long term, the idea was that Europe’s monetary union needed to be accompanied by a fiscal union, with control over spending and taxation transferred from national parliaments to EU institutions. For the short term, however, the recipe was tighter fiscal rules, spending cuts, tax increases, wage restraint and reforms to labour and product markets to make weaker states more competitive.

Austerity measures contributed to the downfall of one European government after another – Greece, Ireland, Italy, Portugal, Spain. Now it is election season in France and Greece, with the Netherlands to follow in September after last weekend’s collapse of its ruling coalition, and the austerity master plan is testing EU voters’ patience and the resolve of politicians.

“The coming elections mark the return of politics to the European stage after economics dominated it under financial duress,” says one EU diplomat. “People are not stupid and they’re not europhobe. They are worried, wary and sceptical whether any government can stem the tides of this financial crisis.”

That dismay was reinforced on Thursday when recession-stricken Spain had its debt standing cut two notches by Standard & Poor’s, with the credit rating agency warning that a further downgrade could follow. The move came in spite of successive rounds of austerity both before and after the centre-right Popular party came to power in polls last November.

Of the elections to come, the most high-profile is in France, where the strength of anti-EU fringe parties in Sunday’s first round of the presidential election – from Marine Le Pen’s 17.9 per cent on the far right to Jean-Luc Mélenchon’s 11.1 per cent on the far left – is tempting the two mainstream contenders in next week’s run-off to seek victory through policy proposals that stray from EU orthodoxy.

This dynamic is most clearly benefiting François Hollande, the frontrunner and Socialist challenger, who is critical of eurozone leaders’ centrepiece achievement: a treaty obliging all 17 countries to maintain balanced budgets. He vows to supplement it with growth-orientated measures.

Some EU officials dismiss Mr Hollande’s demands as campaign rhetoric that will be softened if he wins the presidency. But his success is influencing the calculations of Nicolas Sarkozy, the incumbent, who said this week he would take the treaty to a national referendum if its passage was blocked in France’s legislature.

It is also heartening the demoralised European centre-left, which had suffered a string of electoral defeats during the financial crisis. Centre-left leaders are wielding austerity as a cudgel with which to beat eurozone conservatives in an attempt to break their domination of the political landscape. “Two years of conservative ‘austerity only’ policies shrank economic growth and indeed political reputations,” says Sergei Stanishev, the former Bulgarian prime minister who heads the centre-left’s pan-European Party of European Socialists. “François Hollande’s victory will create a new situation in the European Council. It will break the ‘Merkozy’ impasse and allow for debate and a variety of views.”

France is not the only country where voters could upset the apple cart. The collapse of the Dutch government signalled to markets that even a country with a triple A credit rating and a reputation for fiscal conservatism was finding it a struggle to meet tougher EU rules.

Opinion polls indicate that if elections were held today, eurosceptic parties such as the Freedom party of Geert Wilders, the anti-Muslim populist, and the surging far-left Socialist party would take as much as a third of the seats in parliament. Neither grouping is likely to enter the next government, but even though other parties on Thursday managed to cobble together an accord on spending cuts and tax rises, such a large and fiercely motivated opposition might hamper the next administration’s pursuit of austerity and fiscal integration.

Greece will hold parliamentary elections on the same Sunday as the French vote, and the two main parties that agreed tough terms for a €174bn rescue last month are polling a combined 35 per cent. While this might be enough for them to form a government, a clutch of anti-austerity groups are on course to enter parliament. That will test the new coalition’s ability to assemble yet another €11bn in spending cuts to satisfy creditors.

Apostolos Tamvakakis, who heads National Bank of Greece, the nation’s largest bank, voices confidence that the main parties will keep their promises. “I don’t think the country is going to deviate from that. We’re in the process of things becoming better …The turning point for Greece will come after the middle of 2013.”

Greeks can only hope he is right. Official forecasts this week estimated that the economy, in a fifth consecutive year of recession, would contract by a worse than expected 5 per cent this year. But George Provopoulos, the central bank governor, warned that unless Greece stuck to its austerity course, it risked “a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union”.

A sense of concern is rising across Europe, and not only because of Greece’s plight. “The worry I have in the whole European debate – and we see it in the French presidential election, we see it in the Netherlands, we have seen it also in Finland – is that some fundamentals of European integration are under attack,” says Alexander Stubb, Finland’s EU affairs minister. “They include Schengen [the borderless travel accord], the ECB, the euro, the internal market and trade policy. And you know, if we take them away, what’s left?”

Get alerts on Eurozone economy when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Follow the topics in this article