http://www.nytimes.com/2012/05/11/world/europe/europe-opting-for-growth-over-austerity-in-name-at-least.html
May 10, 2012 Germany Likely to Allow Modest Growth Policy in Europe By NICHOLAS KULISH and JACK EWING BERLIN — The outlines of a potential compromise in Europe’s battle between deficit-cutting austerity and policies to promote growth has begun to take shape. The question is whether the kind of cautious measures palatable to Germany, austerity’s champion, will do enough to combat the Continent’s imbalances and do it soon enough to put its weaker countries on more solid economic footing. In typical German fashion, the steps under discussion are incremental and spread across a range of policy areas so as not to raise the ire of German voters. Germany’s rigid central bank has signaled a willingness to tolerate slightly higher inflation, while the government has indicated its openness to modest but real wage growth in Germany. Most important for the stricken economies, the German chancellor, Angela Merkel, may be prepared to accept a longer timetable for curtailing budget deficits for countries like Spain that are reeling from recession. For Ms. Merkel, the most important prize is ratification of the financial compact, signed in March by the leaders of 25 of the 27 European Union countries, to control deficits in the long run. Ever since the victory of François Hollande in the French presidential election on Sunday, the debate in Europe has shifted, with attention focusing on Ms. Merkel’s growing isolation over austerity and whether she would yield to calls for stimulus spending to promote short-term economic growth. The recognition seems to be dawning even here that forcing heavily indebted countries to cut spending too quickly and deeply can be counterproductive. “The mood appears to be shifting in Germany,” said Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations in Berlin. “Even conservative economists are beginning to question whether this austerity is too brutal at the moment.” Despite marked differences in tone between Ms. Merkel and Mr. Hollande, they may not be so far apart in substance, said Mujtaba Rahman, an analyst at Eurasia Group, a consultancy in New York. Germany may ultimately accept minor adjustments to Greece’s aid program if a viable government emerges, Mr. Rahman said. “This is Germany’s way of signaling both to Hollande and the Greek political elite it is willing to be constructive to keep the system together,” Mr. Rahman said. German officials have been adamant in their public statements that there would be no renegotiation with the Greeks of the terms of the bailout. The sharp reduction in public spending in the teeth of a recession has sent Greek unemployment over 20 percent and, in Sunday’s elections, brought radical parties on the right and left into Parliament. Speaking at a news conference in Berlin on Thursday, Finance Minister Wolfgang Schäuble repeated Germany’s mantra that Greece had to stand by its commitments, but this time he added the new element that Berlin could tolerate a slightly higher inflation rate. Germany has traditionally found inflation “in the corridor between 2 and 3 percent” acceptable, Mr. Schäuble said, even though the European Central Bank’s official target is about 2 percent. Mr. Schäuble was echoing a statement to the German Parliament the day before by the German Bundesbank, normally a bastion of price stability, that higher inflation rates in Germany were acceptable as long as the euro zone average remained on target. The Bundesbank said the country might have inflation above the euro zone average as other countries regained competitiveness. A more flexible line by the powerful German bank, after which the European Central Bank was modeled, would create space for the E.C.B. to cut interest rates further or take other steps to encourage growth. Earlier in the week Mr. Schäuble said higher wages for German workers could also help combat imbalances in the euro zone, where years of wage discipline have made German companies far more competitive than those in many of Germany’s neighbors. His statement coincided with warning strikes across Germany by IG Metall, one of the country’s most powerful unions, which is pushing for higher wages for workers in the automobile, steel and electronics industries. If prices and wages rise in Germany, it will be easier for countries like Spain, Italy and Greece to compete. Other measures under consideration include increasing financing for the European Investment Bank as well as helping struggling countries tap unspent resources in existing European Union funds. But these proposals would offset just a tiny fraction of the cuts in public outlays pursued by countries trying to rein in their debt. While her subordinates were talking of compromise, Ms. Merkel maintained her tough line before a domestic audience that has little sympathy for Europe’s laggards, particularly Greece. Germans will vote in an important election on Sunday in North Rhine-Westphalia, the country’s most populous and politically significant state. In an address to Parliament on Thursday, Ms. Merkel rejected proposals to allow more deficit spending in the name of growth. She said that “growth through debt,” pumping up government spending to stimulate growth, would “send us back to the beginning of the crisis.” At the Group of 8 summit meeting next week at Camp David, Ms. Merkel is sure to face pressure from allies — in particular the United States — to loosen the purse strings and encourage growth. But in Thursday’s address, she rejected “wonder weapons” like issuing joint European debt and warned that the Continent faced a long slog. Mr. Dullien of the European Council on Foreign Relations said deficit spending to stimulate the economy and delaying spending cuts were not the same thing in the eyes of voters here. “You can sell that much more easily to the German public,” Mr. Dullien said, referring to delays in cuts. “They are trying to do what’s politically palatable to ease the burden and allow more room for growth.” German policy makers have played down disagreements with Mr. Hollande since his victory on Sunday, pointing to the long and successful cooperation between Chancellor Helmut Kohl, a conservative, and President François Mitterrand, a socialist. Indeed, Ms. Merkel spent her first term as chancellor in a coalition with the Social Democrats, combating the financial crisis with a Social Democrat, Peer Steinbrück, as finance minister. The financial compact remains the most important prize for Ms. Merkel, and she needs the Social Democrats’ help in Parliament to pass it with the required super majority. Ms. Merkel has proved adept at shifting with the circumstances to get what she wants, more pragmatic than dogmatic, to the obvious frustration of her opponents. Sigmar Gabriel, the leader of the Social Democrats, said Wednesday that Ms. Merkel “will make the shift” toward more growth policies, the German news agency dpa reported. “She’ll even explain that it was her idea.” -- Robert Naiman Policy Director Just Foreign Policy www.justforeignpolicy.org [email protected] _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
