Merkel rejects Obama warnings that cuts will damage global recovery

German Chancellor set for showdown with US President at G20 summit over concerns euro still not safe from collapse

Tony Paterson
Sunday 23 October 2011 08:11

Germany and the United States appear set for a heated showdown at this weekend's G20 summit in Canada after Chancellor Angela Merkel flatly rejected warnings from President Barack Obama that Europe's attempts to save its way out of the debt crisis could put fragile global economic growth in danger.

Germany has the continent's largest austerity package, which will see up to €80bn worth of spending cuts imposed under a draconian savings programme agreed by Ms Merkel's coalition government a fortnight ago.

Spain has also recently unveiled a €15bn savings programme extended over two years and Britain followed suit on Tuesday with one of its biggest austerity packages since the Second World War.

But Europe's axe-wielding has raised concerns in Washington that a sudden round of belt-tightening in one of the world's key economic regions will put a brake on the global economy at a time when growth is of paramount importance.

President Obama has written to European leaders in the run-up to this weekend's G20 summit setting out his fears. "I am concerned about weak private sector demand and continued heavy reliance on exports," he wrote in a clear reference to Germany. It was announced in Berlin yesterday that Ms Merkel, the leader of Europe's largest economy, had spent 15 minutes on the phone with the US President discussing the matter.

However, in an attempt to regain badly needed popularity following her perceived bungling of the euro crisis, Ms Merkel refused to concede to US fears about growth inhibition. Defending her savings programme yesterday, she insisted: "Good savings programmes speed up private consumption because they give people a sense of security." Her agenda at the G20 is to secure an agreement for a bank and financial transaction tax.

She added in a recent rebuttal of economic stimulus packages: "If we don't go for sustainable growth, but just create puffed-up growth, we will pay for that with another crisis." Political observers have pointed out that Ms Merkel's political survival rests on the success of her austerity package.

Behind the scenes yesterday the German government admitted Berlin will be at odds with Washington at the G20 meeting over how best to tackle the economic crisis. "It is a question of what is worse: the threat of economic collapse or the threat of a debt crisis," is how one source put it.

Ms Merkel's ailing coalition, which is in the midst of its deepest popularity crisis since it was elected eight months ago, has been given an unexpected boost by recent industry and chamber of commerce forecasts predicting that Germany is on course to notch up an unexpected 2.3 per cent growth rate this year.

Hugely encouraged by that news, the chancellor has refused to bow to criticism. Declaring that the crisis was effectively over in Germany, she said: "These results are sensational. They are an important sign which should give us encouragement."

But criticism of her government's economic policies shows no sign of abating. George Soros, the renowned Hungarian investor and currency speculator, yesterday warned that the deficit-slashing policies could bring about the collapse of the euro and the break-up of the European Union unless they were radically altered to promote growth.

"Germany is isolated in the world. Because of its history it is more afraid of inflation than recession. In the rest of the world it's the other way round," Mr Soros said in an interview with Germany's Die Zeit newspaper. "Unfortunately the collapse of the euro and the European project cannot be ruled out," he added.

Mr Soros argued that Germany's concentration on cutting its own deficit would eventually drive its European neighbours into deflation. He suggested that the result would be a prolonged economic stagnation coupled with social unrest and a rise in nationalism and xenophobia. The Nobel prize-winning economist Paul Krugman also warned recently that Germany's "deficit hawks" were risking a return to the economics of the Weimar Republic.

Mr Soros claimed that Europe faced less of a currency and deficit crisis than a bank crisis. He proposed recapitalising banks with subsidies drawn from European rescue funds. Germany, Mr Soros said, treated the Maastricht treaty and its rules governing the stability of the euro as if it were a "holy scripture" but did far too little to stimulate growth.

"If the Germans don't change their policies, then it would be helpful for the rest of Europe if they abandoned the single currency," he said. "The euro would then drop in value and the mark would go up. Then the Germans would finally realise how unpleasant an overvalued currency can be."

Painful medicine

€80bn the amount Germany wants to save by 2014

€30bn to be slashed from welfare payments including unemployment benefit over next four years

€2.3bn to be raised by new taxes including a levy on domestic air travel.

40,000 number of armed forces jobs to be cut

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