Merkel Backs Draghi’s Call for Growth to Combat Debt Crisis

Chancellor Angela Merkel backed European Central Bank President Mario Draghi’s call to focus on spurring economic growth, as German officials rejected charges they are fixated on budget austerity to fight the debt crisis.

Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” the chancellor told a conference of her Christian Democratic bloc in Berlin today.

Merkel was responding to a call by Draghi in Brussels for European leaders to widen their crisis response beyond cutting debt and deficits, the goal of the German-led fiscal pact signed by euro-area leaders in March. Draghi entered the fray as Francois Hollande, the French presidential election front- runner, campaigns for treaty changes to promote growth.

“We’ve had a fiscal compact,” Draghi said. “What is most present in my mind now is to have a growth compact.”

Hollande called the remarks helpful and said France won’t ratify the fiscal pact in its current form if he is elected. “The main risk at this time is that the European economy remains in a recession because not enough credit is provided to companies,” the Socialist candidate told a news conference in Paris today.

Germany, Europe’s biggest economy and the biggest country contributor to euro-area bailouts for Greece, Portugal and Ireland, is facing calls from across the region to augment its austerity emphasis as a $1 trillion firewall and unlimited ECB loans fail to stop the crisis from threatening Spain and Italy.

‘Firm and Friendly’

Setting his sights beyond France’s runoff vote on May 6 that polls suggest he will win, Hollande said he’ll be “firm and friendly” with Merkel. “We’ll have to open the discussion. There’s no need to create a conflict, even if we’re not here to hide our divergences.”

The European Union’s head office today asked for a growth- boosting 6.8 percent budget increase to 138 billion euros ($182 billion) for 2013, challenging contributor countries from Britain to Germany to put up more money at a time of austerity and recession.

Merkel, who spent months lobbying fellow leaders for the fiscal pact signed on March 2, said budget rigor isn’t the only solution to the crisis. “We need growth in the form of sustainable initiatives, not simply economic stimulus programs that just increase government debt,” she said in Berlin.

Country-Specific

The growth pact may take the form of an annex to the fiscal compact in which country-specific recommendations for growth- boosting measures would be made, a German government official said on condition of anonymity. Steps to raise competitiveness along with structural reforms are likely to feature, with a target date for completion of the Group of 20 leaders’ summit in Mexico on June 18-19, the official said.

“The new European mantra is fiscal discipline and growth,” Douglas Borthwick, managing director and head of foreign-exchange trading at Faros Trading LLC in Stamford, Connecticut, said in an e-mail. “I expect an announcement of Europe-wide infrastructure within the next month.”

Europe has had “enough” austerity, Hollande said yesterday in an interview with France’s TF1 television. He said two days ago that budget austerity across Europe is “bringing desperation to people” and that he’ll refocus the economy on growth if he gets elected.

Germany has always regarded reducing debt along with measures to bolster economic growth as key to winning back financial-market confidence damaged during the debt crisis, Deputy Finance Minister Thomas Steffen said separately today.

No ‘Taliban’

“Talking about fiscal discipline does not mean that Germany is, let’s say, more or less a kind of consolidation Taliban,” Steffen said at a Euromoney conference in Berlin. “We do not think it’s all about fiscal consolidation, we very much believe that the euro zone also needs more growth.”

Steffen and Bundesbank board member Andreas Dombret both defended Germany’s insistence that overspending European governments cut their budget deficits.

If governments keep cutting deficits, “negative short-term effects can’t be ruled out,” said Dombret. Even so, “consolidation constitutes necessary corrections of an unsustainable development,” he said.

“The long-term gains not only vastly exceed potential short-term pain, they also help to alleviate it now by restoring the lost credibility in the ability to tackle the root causes of the crisis.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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