Schäuble: Austerity is essential to solve crisis

The German Finance Minister, Wolfgang Schäuble, has warned that allowing debt-laden countries to increase their borrowing would be akin to giving alcohol to an alcoholic.

Speaking in Washington DC at the weekend, Mr Schäuble said: "It is my conviction that a strategy built on piling on more debt will stunt rather than stimulate growth in the long run. We will err if we assume that markets will tolerate debt levels as in the past."

According to Mr Schäuble, an influential minister in Angela Merkel's coalition government in Berlin: "The main reason for the 2008 crisis was too high deficits and too high debts ... You can't cure an alcoholic by giving him alcohol."

His comments, at a conference organised by the Institute of International Finance, constituted a firm repudiation of the advice from the head of the International Monetary Fund, Christine Lagarde, who argued last week that countries which had room to borrow in the international financial markets should do so in order to prop up collapsing demand in the global economy.

Mr Schäuble said: "It is essential to stick to our common commitments agreed by the G20 at the Toronto summit [in 2010] to make substantial progress on reducing our deficits until 2013 and stabilise public debt by mid-decade. Otherwise another crisis of confidence might be in the offing ... Consolidation efforts must not be postponed."

He also repeated his rejection of the idea that eurobonds, or bonds issued jointly by nations using the single currency, could solve the eurozone's sovereign debt crisis. A common debt union would destroy the "sticks and carrots" that prevented individual states from over-borrowing, he added.

Mr Schäuble said: "I understand why states with high interest rates want eurobonds. But if they were adopted everyone would realise that the euro had given up the aim to be a solid and stable currency ... If you violate [spending limits] you have to suffer higher interest rates. If you have eurobonds you destroy sticks and carrots."

Mr Schäuble stressed that Greece and other troubled eurozone countries must continue to cut their deficits, despite facing high unemployment. "Member states faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural obstacles for sustainable growth," he said. "By this strategy, we allow for the economic recovery of the states concerned and lay the basis for sustainable growth in the eurozone as a whole."

Mr Schäuble has taken a consistently hard line on Greece. Last week he told a German business magazine, WirtschaftsWoche: "We cannot spare the Greek people the necessary adjustment measures. At the end, the people decide whether they can, and will, take the burden We should have respect for the enormous adjustment burdens which are being demanded from the Greek people. Although it does not always seem to be fair, if one can believe the media reports of yachts in Piraeus or Mykonos and other places."

German MPs will vote this week whether to approve the extension of powers of the European bailout agreed by EU leaders in July. Next month, the Bundestag is scheduled to vote on whether to approve the second €109bn bailout for Greece.