Gloom gathers over Davos as Merkel digs in her heels on debt

German Chancellor insists she will not offer more funds to solve crisis

Ben Chu
Thursday 26 January 2012 01:00
Angela Merkel works on her speech at Davos yesterday
Angela Merkel works on her speech at Davos yesterday

Angela Merkel yesterday dashed hopes that Germany was preparing to sanction a significant increase in support to its troubled European neighbours to bring the eurozone sovereign debt crisis to an end.

Speaking at the opening of the annual gathering of politicians and business leaders at the World Economic Forum in Davos, Switzerland, the German Chancellor insisted that her government would not be increasing its financial commitment to indebted eurozone nations such as Greece, Portugal, Ireland, Spain and Italy.

"We have said right from the start that we want to stand up for the euro, but what we don't want is a situation where we are forced to promise something that we will not be able to fulfil," Ms Merkel told a packed conference hall. "I know we are labelled the big headache of the global economy. But we are not the only ones."

Earlier, Ms Merkel was even more explicit, arguing that there would be "no point" in promising more money without tackling the causes of the crisis and rejecting, once again, the proposal that European member states should jointly guarantee their debts.

Pressure on the Chancellor to increase support to Germany's neighbours has intensified, with Christine Lagarde, the managing director of the International Monetary Fund (IMF), calling on Germany to boost the size of its commitment to the European bailout fund. The Italian Prime Minister, Mario Monti, also called for more help from Berlin to assist his own country.

There were indications that German resistance was breaking down and that Ms Merkel was prepared to increase her country's guarantees in return for a new "fiscal compact" between EU member states that would help to ensure future budgetary responsibility.

Ms Merkel also called for Brussels to be given more power to supervise the budgets of members. "We have to become used to the European Commission becoming more and more like a government," she said.

But she made it clear that the onus would remain on eurozone nations to slash their deficits and that no extra financial support from Germany would be forthcoming to ease the transition.

Speaking to European newspapers yesterday, she also cast doubt on the hopes of saving Greece. "We haven't overcome the crisis yet," she said. "Of course, there's Greece, a special case where, despite all the eff orts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilise the situation."

The billionaire investor and philanthropist George Soros attacked Germany's approach. Speaking to journalists in Davos yesterday, he said Germany had exacerbated the emergency by insisting on austerity measures alone as the solution to the funding difficulties of indebted countries on the periphery of Europe. This single-handed approach had created a "vicious circle" of spending cuts and economic contraction, he said.

"The austerity Germany wants to impose will push Europe into a deflationary debt spiral," Mr Soros added. "Reducing the budget deficit will put both wages and profits under downward pressure, the economy will contract and tax revenues will fall. So the debt burden... will actually rise, requiring further budget cuts and setting in motion a vicious circle." This, he argued, risked tearing Europe apart.

However, Ms Merkel denied that Germany was only advocating austerity measures.

"It is also structural reforms that lead to more jobs," she said, pointing to the success of Germany in invigorating its sclerotic economy in the previous decade through a shake-up of its labour market.

Elsewhere, a spokesman for the Greek government said it was aiming to conclude its negotiations with the Institute of International Finance lobby group over a write-down of Athens's debt pile by the end of the week.

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