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Thursday, 5 March 2009
France and Germany at odds at crucial time
Now, with the financial crisis showing no signs of bottoming out, the opportunity for Paris and Berlin to promote unity should have been ideal. Instead, they have adopted opposing tacks over how Europe should respond to the global meltdown.
BERLIN: In the past when the European Union was paralyzed by a crisis, France and Germany would come to the rescue. Their leaders have not always seen eye to eye, but over the decades they have generally found compromises that have kept the European integration project alive.
Now, with the financial crisis showing no signs of bottoming out, the opportunity for Paris and Berlin to promote unity should have been ideal. Instead, they have adopted opposing tacks over how Europe should respond to the global meltdown.
Chancellor Angela Merkel doesn’t want Europe to try to spend its way out of the crisis. Her big concern is the explosion of public debt and ensuing inflation. Ever since the 1920s, when galloping prices wiped out German wealth, inflation has been the bête noire of the German psyche.
President Nicolas Sarkozy, in contrast, has been advocating both protectionist policies and big spending programs, much to the exasperation of Merkel’s economic advisers. In order to counter Sarkozy’s ideas, Merkel has begun forging alliances with small and medium-sized countries, something which another conservative chancellor, Helmut Kohl, was adept at.
In Merkel’s case, it is all part of a bid to rein in the influence of France and a group of big-spending countries - Ireland, Greece, Italy, Spain and Portugal - which are all members of the euro zone. They lean toward Paris and they have some of the highest public debts in the bloc. Greece’s public deficit this year is expected to reach 100 percent of gross domestic product and Italy is seen climbing to 110 percent by 2010. All these countries, therefore, are in breach of the EU’s Stability Pact rules, which limit budget deficits to 3 percent of gross domestic product.
These countries would support less stringent EU rules to accommodate their high public debts rather than introduce structural reforms that would be unacceptable to the public in this time of rapid economic slowdown.
Many Germans are nostalgic for the days of their strong national currency, the mark, and fear that high inflation could destroy wealth and erode economic confidence. More immediately, individual euro-zone countries with particularly high deficits could threaten to default on their debts, requiring expensive bailouts by the rest of the group. That, said one Scandinavian diplomat, was Merkel’s nightmare.
The costs to Germany, the bloc’s largest economy and biggest contributor to the EU budget, could run very high.
“It would be Germany that would have to dole out even more money to governments that Merkel believes have adopted irresponsible fiscal policies,” said Günter Deuber, an economist at Deutsche Bank Research.
But what worries Merkel most of all, is that no one knows how long the crisis will last or how much deeper it will go. No one knows if the economic stimulus measures introduced by several EU member states and the United States will safeguard growth. And above all, no one knows what will encourage the banks to start lending again. Against this background of uncertainty, Merkel thinks it essential that governments retain their ability to set new policies and not drown in debt.
Merkel’s allies are mostly in Northern Europe. They include Sweden, Finland, Denmark, the Netherlands and Luxembourg, as well as Poland and the Czech Republic. These governments have kept a steady hand on fiscal and monetary policy and their populations save.
The budget deficits among these countries are under control, as are their public debts. Finland’s public debt amounted to 33 percent of gross domestic product in 2008, while Denmark’s totaled 26.3 percent. Of course, the deficits will rise this year to mitigate the impact of an economic slowdown.
But Jacek Rostowski, Poland’s finance minister, said he did not believe in increasing budget deficits and the public debt. “We would end up like Hungary,” referring to the miserable state of Hungary’s finances under the Socialist prime minister, Ferenc Gyurcsany.
All this is grist for Merkel’s mill. In recent weeks, she has quietly lobbied for a renewal of the Stability Pact to curb spending across Europe. But this is also about Europe’s demographic outlook. The falling birth rate means that governments will be able to pass the future debt burden on to fewer and fewer taxpayers.
Merkel has one disadvantage with her choice of allies: Except for the Netherlands, Finland and Luxembourg, they do not belong to the euro-zone group of countries. That is why Merkel has resisted Sarkozy’s call for a summit meeting of euro-zone members, believing Germany would come under too much pressure by the big spenders in the group.
After all, she has already had a taste of that. Only after much criticism from some EU countries, Berlin finally decided to spend up to €80 billion, or $100 billion, to stimulate the economy and provide up to €500 billion in state-backed guarantees for the banks. As a result, the budget deficit, brought down to 0.8 percent of GDP in 2008, will increase this year to around 3 percent. Still, in this election year, Merkel has managed to keep a tight hold on the purse strings.
In return for agreeing to the stimulus package, Merkel was able to push through an accord to include a ban on future debts in the German constitution. In “normal” economic times, the federal government and the states are to issue debt amounting to no more than 0.5 percent of GDP. The strict limits could be exceeded only in emergencies, and only if the imbalance can be offset by future surpluses.
If that clause makes it into the German Constitution, the country might be able to finally consolidate its finances. But this would also mean that other EU countries would find it even more difficult to raid Germany’s coffers for new EU-wide rescue measures.
The thrifty northern countries applaud Merkel’s policies; the profligate southerners scoff at her parsimony. Berlin, now more than ever, is conducting its economic policies according to its perception of its national interests. The effect is to deepen the fissure that divides Northern and Southern Europe.
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France and Germany at odds at crucial time
By Judy Dempsey
4 March 2009
BERLIN: In the past when the European Union was paralyzed by a crisis, France and Germany would come to the rescue. Their leaders have not always seen eye to eye, but over the decades they have generally found compromises that have kept the European integration project alive.
Now, with the financial crisis showing no signs of bottoming out, the opportunity for Paris and Berlin to promote unity should have been ideal. Instead, they have adopted opposing tacks over how Europe should respond to the global meltdown.
Chancellor Angela Merkel doesn’t want Europe to try to spend its way out of the crisis. Her big concern is the explosion of public debt and ensuing inflation. Ever since the 1920s, when galloping prices wiped out German wealth, inflation has been the bête noire of the German psyche.
President Nicolas Sarkozy, in contrast, has been advocating both protectionist policies and big spending programs, much to the exasperation of Merkel’s economic advisers. In order to counter Sarkozy’s ideas, Merkel has begun forging alliances with small and medium-sized countries, something which another conservative chancellor, Helmut Kohl, was adept at.
In Merkel’s case, it is all part of a bid to rein in the influence of France and a group of big-spending countries - Ireland, Greece, Italy, Spain and Portugal - which are all members of the euro zone. They lean toward Paris and they have some of the highest public debts in the bloc. Greece’s public deficit this year is expected to reach 100 percent of gross domestic product and Italy is seen climbing to 110 percent by 2010. All these countries, therefore, are in breach of the EU’s Stability Pact rules, which limit budget deficits to 3 percent of gross domestic product.
These countries would support less stringent EU rules to accommodate their high public debts rather than introduce structural reforms that would be unacceptable to the public in this time of rapid economic slowdown.
Many Germans are nostalgic for the days of their strong national currency, the mark, and fear that high inflation could destroy wealth and erode economic confidence. More immediately, individual euro-zone countries with particularly high deficits could threaten to default on their debts, requiring expensive bailouts by the rest of the group. That, said one Scandinavian diplomat, was Merkel’s nightmare.
The costs to Germany, the bloc’s largest economy and biggest contributor to the EU budget, could run very high.
“It would be Germany that would have to dole out even more money to governments that Merkel believes have adopted irresponsible fiscal policies,” said Günter Deuber, an economist at Deutsche Bank Research.
But what worries Merkel most of all, is that no one knows how long the crisis will last or how much deeper it will go. No one knows if the economic stimulus measures introduced by several EU member states and the United States will safeguard growth. And above all, no one knows what will encourage the banks to start lending again. Against this background of uncertainty, Merkel thinks it essential that governments retain their ability to set new policies and not drown in debt.
Merkel’s allies are mostly in Northern Europe. They include Sweden, Finland, Denmark, the Netherlands and Luxembourg, as well as Poland and the Czech Republic. These governments have kept a steady hand on fiscal and monetary policy and their populations save.
The budget deficits among these countries are under control, as are their public debts. Finland’s public debt amounted to 33 percent of gross domestic product in 2008, while Denmark’s totaled 26.3 percent. Of course, the deficits will rise this year to mitigate the impact of an economic slowdown.
But Jacek Rostowski, Poland’s finance minister, said he did not believe in increasing budget deficits and the public debt. “We would end up like Hungary,” referring to the miserable state of Hungary’s finances under the Socialist prime minister, Ferenc Gyurcsany.
All this is grist for Merkel’s mill. In recent weeks, she has quietly lobbied for a renewal of the Stability Pact to curb spending across Europe. But this is also about Europe’s demographic outlook. The falling birth rate means that governments will be able to pass the future debt burden on to fewer and fewer taxpayers.
Merkel has one disadvantage with her choice of allies: Except for the Netherlands, Finland and Luxembourg, they do not belong to the euro-zone group of countries. That is why Merkel has resisted Sarkozy’s call for a summit meeting of euro-zone members, believing Germany would come under too much pressure by the big spenders in the group.
After all, she has already had a taste of that. Only after much criticism from some EU countries, Berlin finally decided to spend up to €80 billion, or $100 billion, to stimulate the economy and provide up to €500 billion in state-backed guarantees for the banks. As a result, the budget deficit, brought down to 0.8 percent of GDP in 2008, will increase this year to around 3 percent. Still, in this election year, Merkel has managed to keep a tight hold on the purse strings.
In return for agreeing to the stimulus package, Merkel was able to push through an accord to include a ban on future debts in the German constitution. In “normal” economic times, the federal government and the states are to issue debt amounting to no more than 0.5 percent of GDP. The strict limits could be exceeded only in emergencies, and only if the imbalance can be offset by future surpluses.
If that clause makes it into the German Constitution, the country might be able to finally consolidate its finances. But this would also mean that other EU countries would find it even more difficult to raid Germany’s coffers for new EU-wide rescue measures.
The thrifty northern countries applaud Merkel’s policies; the profligate southerners scoff at her parsimony. Berlin, now more than ever, is conducting its economic policies according to its perception of its national interests. The effect is to deepen the fissure that divides Northern and Southern Europe.
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