LONDON Global investors and European voters, seeming adversaries through two years of non-stop euro crisis, now appear to be reaching the same conclusion: austerity-induced recession can't be the only solution to the sovereign debt mess.
After a brief stabilization brought on by the European Central Bank's cheap money floods in December and February, asset managers resumed their flight from euro area assets last month - not just from the hobbled government bonds of the euro fringe but from the region's blue chip stock markets too.
Reuters' latest survey of global asset managers threw up an alarming response. Not only have overseas investors remained wary about the euro zone's current trajectory, but continental European funds appear to be accelerating their exit too.
European funds' holdings of euro zone bonds and equities fell to their lowest levels in at least the past year - lower than during the white heat of the crisis last November.
Data from Boston-based fund tracker EPFR echoes that and shows outflows last week from European stocks and bonds surged to their highest level this year. And big redemptions from German exchange-traded equity funds, not just the battered economies on the euro periphery, drove a $4.6 billion exodus from regional equity funds - the biggest weekly outflow since August.
"The greatest risk we perceive today is in the euro area and the downside risk to the macroeconomic scenario due to the pro-cyclical effects of austerity policies and long-lasting deleveraging," said Reuters poll respondent Nadege Dufosse at Dexia Asset Management in Luxembourg.
Although more prosaic in its description of the problem of government cuts in already weak or contracting economies, it's essentially the same message being heard from French, Greek, Dutch and Irish voters and from noisy labor unions protesting government cutbacks across Europe on May Day.
Investors appear increasingly fearful the European Union's new fiscal compact - demanded by Germany in December as a way of setting national budget limits in stone as a precursor to a permanent bailout mechanism - has become unbalanced and risky.
Even European Central Bank chief Mario Draghi called last week for governments to also agree a "growth compact".
First off, money funds are growing uneasy about the extent to which austerity alone is elevating political risks everywhere within the zone.
Most obviously, French Socialist leader Francois Hollande and his pledge to renegotiate the fiscal pact are 6-10 points clear of incumbent conservative Nicolas Sarkozy before this Sunday's presidential election runoff.
But the bigger investor fear is that no significant sovereign debt reduction seems possible without some growth in affected economies that boosts tax revenues over time. And if constant austerity via slashed government spending snuffs out all that growth, you risk the worst of both worlds for creditor and voter alike - stagnation with no debt reduction.
It's the same political debate raging across the western world and likely a central topic in November's U.S. presidential elections as well as a prime mover of opinion poll ratings for Britain's embattled coalition government.
The conundrum may well have the peculiar effect of aligning international money managers, left-leaning politicians and angry voters.
Jim O'Neill, chairman of Goldman Sachs Asset Management and tipped by some this week as possible future Bank of England chief, told clients on Sunday that investors may even respond positively a change in the thrust of euro fiscal policy.
"Perhaps the appearance of a left-of-centre French President may result in another fresh policy effort across the entire euro area, which gives more attention to supporting growth as opposed to deflationary fiscal retrenchment and reform?" he asked, acknowledging skepticism about euro policy initiatives.
The political pressure from outside the bloc is rising too. Former U.S. Treasury Secretary and Democratic party grandee Lawrence Summers said on Monday that Europe will only solve its problems with a euro-wide initiative to restore growth.
"A country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favor," he wrote in an opinion column for Reuters.
Yet not everyone thinks another euro-wide scheme is the answer. Avinash Persaud, chairman of London- and Mumbai-based investment bank Elara Capital, says the euro's salvation lies in a little less Europe, not more.
Persaud said that to offset the variable impact of the one-size-fits-all euro exchange rate and interest rate, the EU needs preserve space for more countercyclical fiscal and regulatory policies at a national level alongside euro-wide stabilization funds to insulate countries from temporary liquidity shocks.
"We need to appreciate that the way to help a drowning man is not to put him in a straightjacket," he added. "Pan-European policies that make it harder for a fiscal stimulus in depressed Dortmund and harder for bank regulators to curb lending in booming Dublin will only make matters worse."
(Editing by Ruth Pitchford)