‘We all want to put the global economy back on its feet’
By Bertrand Benoit, Quentin Peel and Chris Bryant in Berlin
Published: March 27 2009 23:30 | Last updated: March 27 2009 23:30
Listening to Angela Merkel outline her expectations for next week’s G20 summit in London it is hard to recall that only three weeks ago US and European leaders were at loggerheads over how best to tackle the world financial and economic crises.
“We are coming together to make joint decisions, not to compete against each other,” she said. “We all want the same thing: to put the world economy back on its feet as fast as possible and to prevent such a crisis from happening again.”
While US officials were calling for more action from Europe to boost spending and demand, European countries led by Germany and France have been calling for tougher action on future financial regulation.
“I think we can achieve good results in all areas and I was very glad to hear the US president make it clear that he did not want just the one or the other, but both,” said Ms Merkel, who had just talked to Barack Obama via video-conference before she sat down for the interview.
The tension in the transatlantic relationship ahead of the summit has undoubtedly eased, with agreement that financial regulation must be reinforced to revive confidence in the banking system. “There is a global thinking process under way and a recognition that some things have happened that should not have happened,” Ms Merkel said.
She has little time for economic policy advice from across the ocean, such as the notion that Germany, like China, needs to drastically boost its domestic demand to help re-balance a lopsided world economy.
Re-election struggle:
Angela Merkel may be the world’s most powerful woman, but few would want to be in her shoes over the next six months, writes Bertrand Benoit in Berlin.
On September 27, she will stand for re-election when, according to predictions by most economists, the downturn will be at its most brutal. Commerzbank expects the German economy to shrink by 7 per cent this year. Experts are warning about a long-delayed wave of lay-offs that could start crashing in the summer.
Opinion polls show the public has yet to wake up to the dark economic reality, but Ms Merkel’s Christian Democratic Union is already being credited with fewer votes than it got in 2005, which was considered an electoral debacle. Her rival Social Democrats, whom she has been forced to work with in a “grand coalition”, have heaped criticism on her leadership style, while MPs from her own party are increasingly distrustful of her consensual ways.
The financial crisis means the chancellor will have little luxury to indulge in electoral campaigning. Though she, unlike her party, remains popular, Ms Merkel is far from having secured her return to the chancellery.
Germany, she says, is an over-indebted, export-oriented economy with an ageing, shrinking population. It cannot boost consumption at the expense of exports. “The German economy is very reliant on exports, and this is not something you can change in two years,” she said. “It is not something we even want to change.” Instead, it will try to sit through the turbulence while taking care not to lose too much industrial muscle so that it can ride the upturn when it comes.
“China would not even have to raise debt [in order to boost demand],” she says, pointing to the country’s vast currency reserves. “Its growth potential is much higher than Germany’s.”
Evidently confident that she is in the right, Ms Merkel shows little sign of strain after seven months battling a severe financial crisis at home and what is shaping up as the country’s most brutal recession since the 1930s.
She is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”
She is sceptical about calls for bigger public deficits and looser monetary policies – the very things that tipped the world economy into the abyss in the first place – as the way out of the crisis.
“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”
Hence Ms Merkel’s oft-repeated insistence that governments, as they fight the crisis, must also start to think about their “exit strategies” – a return to fiscal discipline, a dismantling of protectionist measures, and mopping up of excess liquidity.
German Chancellor Angela Merkel addresses a press conference concerning Germany's stimulus package, at the chancellery in Berlin on January 27, 2009. Germany's cabinet sealed a multi-billion stimulus package aimed at hauling Europe's biggest economy out of what is feared could be its worst slump for six decades. The raft of measures,worth 50 billion euros (66 billion dollars) over two years, is Germany's largest stimulus plan since World War II and includes a huge increase in infrastructure spending as well as sweeping tax cuts.
‘We are coming together to make joint decisions, not to compete against each other’
Merkel on working with US
The debate about the possible inflationary side-effects of measures taken to tackle the crisis “is something I am taking very seriously”, she said. “As head of the German government, I am most concerned by the debate in Germany, where people are worried about accumulating debt, and about the possible inflationary consequences.”
Markets, she added, “expect to see a return to sustainable fiscal policies after the crisis”. Asked about the failure of a government bond auction in the UK this week, she stopped for a long pause, and chose her words with great care: “It shows states cannot borrow forever,” she said.
Estimates about how much the German economy is expected to shrink this year have worsened dramatically since Ms Merkel’s government adopted its €50bn ($67.9bn, £46.6bn) fiscal stimulus in January. So have expectations about how long the downturn will last. The government is considering cutting its forecast of a 2.25 per cent contraction in gross domestic product growth to 4.5 per cent.
And yet, Ms Merkel insisted once more that the time had not come to consider another package of growth-boosting measures. Setting up a mechanism to help the country’s banks rid themselves of their toxic assets, she said was a more pressing priority, and would be addressed before the election of September 27.
