Brussels: Germany and France both called for economic growth to be at the heart of the Eurozone’s budget strategy on Thursday but German Chancellor Angela Merkel warned against returning to the pre-crisis days of high spending to try to revive the economy.
With the Eurozone flirting with stagnation and deflation, the leaders of the bloc’s two biggest economies put the emphasis on growth as they arrived for an EU summit in Brussels. But their comments betrayed starkly different visions on how to act.
At the centre of tensions are EU budget rules that force countries to control their public finances to win investor confidence. Paris says they risk suffocating money flows to businesses and projects at such a fragile time.
Merkel said that higher deficits did not help growth.
“I think it’s about bringing both together growth and budgetary consolidation,” she told reporters.
“We have had times in Europe with very high deficits and yet no growth, so we must learn from the past and I hope we will find a common solution.” The European Commission, which acts as a budget policeman for the 18-country Eurozone, is reviewing member states’ draft budget plans to see if they are in line with EU budget rules.
The rules oblige governments to strive every year towards balancing their books and avoid any repeat of the 2009-2012 Eurozone crisis, where countries spent well beyond their means.
France and Italy have submitted 2015 budgets that fall short of EU requirements, saying they need to cut spending more slowly to support economic growth. They may have their budgets sent back for adjustments.
French President Francois Hollande said nothing would divert him from his goal of generating jobs and growth.
“We will respect the rules with the maximum of flexibility and that is valid also for the growth objective that we will bring tomorrow during the European Council,” Hollande said, referring to the EU summit.
European Central Bank President Mario Draghi has added his voice to calls for more public spending to help the economy, warning that the economic aftermath of the Eurozone crisis has lasted longer than the Great Recession of the 1930s.
He is expected to address leaders at the summit.
Draghi has also promised to “use all the available instruments” to fight deflation but is running out of weapons as some members of the ECB’s policymaking council are resistant to a U.S.-style bond-buying programme, or quantitative easing.
“Not China”
Meanwhile, Germany, which faces criticism for failing to spend more and support the faltering economy, has its sights on a balanced federal budget next year — a government promise.
Merkel said she supported a 300 billion euro investment programme proposed by incoming European Commission President Jean-Claude Juncker to raise Europe’s growth potential, but again welcomed Juncker’s promise not to change budget rules.
“I support that Jean-Claude Juncker has proposed an investment programme as well as supporting that the rules of the Stability and Growth Pact must be credibly observed,” Merkel said, referring to the budget rules.
Germany and the European Commission, the EU executive, see an investment programme that attracts private investors as a way to channel billions of euros into the economy without getting deeper into debt.
Juncker will unveil the programme before Christmas.
In addition, the Commission and the European Investment Bank (EIB) will draw up a list of infrastructure projects and ways to finance them by December to present to finance ministers.
But economists have doubts any programme could be big enough to help cut near record unemployment, fend off deflation and help weak business confidence.
“This is absolutely no solution to the current crisis,” Citigroup’s chief economist Willem Buiter said in Brussels.
“This is not China where there is a list of projects worth hundreds of billions of euros ready to go ... You have to get planning permission, environmental impact studies, so we are talking three or four years from now (that the money would start flowing),” he said.
