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CONSTRUCTIVE: Germany is moving slowly but definitely to allow for modest growth in Europe, write Nicholas Kulish and Jack Ewing
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 to not raise the ire of voters.
Germany’s rigid central bank has signalled a willingness to tolerate slightly higher inflation, while the government has indicated its openness to modest but real wage growth in the country.
Most important for the stricken economies, German Chancellor Angela Merkel may be prepared to accept a longer timetable for curtailing budget deficits for countries, like Spain, which are reeling from recession.
For 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 May 6, the debate in Europe has shifted, with attention focusing on 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 in Berlin that forcing heavily indebted countries to cut spending too quickly and deeply can be counterproductive.
Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations in Berlin, said: “The mood appears to be shifting in Germany. Even conservative economists are beginning to question whether this austerity is too brutal at the moment.”
Despite marked differences in tone between Merkel and Hollande, they might not be so far apart in substance, said Mujtaba Rahman, an analyst at Eurasia Group, a consultancy in New York.
Germany might ultimately accept minor adjustments to Greece’s aid programme if a viable government emerged, Rahman said.
“This is Germany’s way of signalling to Hollande and the Greek political elite it is willing to be constructive to keep the system together.”
German officials have been adamant in their public statements that there would be no re-negotiation 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 per cent and, in last 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 Schauble 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 two and three per cent” acceptable, Schauble said, even though the European Central Bank’s official target is about two per cent.
Schauble 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 eurozone average remained on target.
If prices and wages rise in Germany, it will be easier for 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 EU 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, Merkel maintained her tough line before a domestic audience that has little sympathy for Europe’s laggards, particularly Greece.
In an address to Parliament on Thursday, she 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 this week at Camp David, the United States, Merkel is sure to face pressure from allies, in particular the US, 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.
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. “You can sell that much more easily to the German public,” 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 policymakers have played down disagreements with Hollande since his victory last Sunday, pointing to the long and successful cooperation between former chancellor Helmut Kohl, a conservative, and former president Francois Mitterrand, a socialist.
Indeed, Merkel spent her first term as chancellor in a coalition with the Social Democrats, combating the financial crisis with a Social Democrat, Peer Steinbrueck, as finance minister.
The financial compact remains the most important prize for Merkel, and she needs the Social Democrats’ help in Parliament to pass it with the required super majority.
She 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 on Wednesday that Merkel “will make the shift” towards more growth policies, the German news agency dpa reported. “She’ll even explain that it was her idea.” NYT