Merkel Pushes Back Against Hollande Call to End Austerity Drive

German Chancellor Angela Merkel said balanced budgets are the best answer to the debt crisis, rebuffing French Socialist presidential candidate Francois Hollande’s campaign pledge to reverse Europe’s austerity drive.

As Europe’s two largest economies head toward potential conflict over quashing the crisis, Merkel and her ruling party stood firm on German-led remedies, including the debt-cutting fiscal pact signed last month by all 17 euro-area leaders.

“If Mr. Hollande were to say that he wants to increase government spending and save less, he’ll lose the confidence of the financial markets,” Peter Altmaier, the parliamentary whip of Merkel’s Christian Democrats, said in an interview in Berlin yesterday. “We will stick to our fundamental principles because there’s really no alternative.”

Germany, the largest country contributor to euro-area bailouts, is facing growing resistance from traditional allies to its anti-crisis prescriptions as a $1 trillion firewall and unlimited European Central Bank loans to the region’s lenders fail to stop the turmoil from threatening Spain and Italy.

Hollande, who leads President Nicolas Sarkozy in polls for France’s runoff election on May 6, 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 wins.

Dutch Prime Minister Mark Rutte urged politicians yesterday to tackle the country’s economic woes after his coalition collapsed over proposed budget cuts, raising investor concern about his country’s ability to retain its AAA credit rating. A proposal on austerity measures will be sent to parliament today.

European ‘Credibility’

Merkel, who faces two German state elections in May and a national election in the fall of 2013, joined with Sarkozy to craft the euro area’s crisis response over the past year and backed him for re-election. She insisted on the need for austerity yesterday, saying Europe’s “credibility” depends on reducing deficits and debt.

“We’re not saying that saving solves all problems,” she told a conference in Berlin. Still, “you can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.”

Dutch bonds rose for the first time in four days yesterday, a day after the extra yield that investors demand to hold 10-year Dutch debt instead of similar-maturity German bunds soared to the most since March 2009. The euro rose 0.4 percent to $1.3204 at 7:09 p.m. Berlin time and the Stoxx Europe 600 index gained 1 percent to 254.37.

May Elections

Merkel may cede ground to austerity critics if the Social Democrats, the main German opposition party, increase their support in May’s state elections as polls suggest, said Thomas Costerg, an economist at Standard Chartered Bank in London.

If Hollande becomes French president and Merkel switches allies to govern with the Social Democrats after the German election in 2013, that “may further help to make views converge,” he said in an e-mail. “The last bastion of austerity could remain the Bundesbank.”

Hollande, at a campaign stop in Brittany, renewed his criticism of German-led austerity and said the ECB needs to do more to support Europe’s growth. On France’s TF1 television station last night, he said he wants a different kind of Europe.

“Merkel has led Europe with Sarkozy and we can measure the results,” he said. “If I am elected president, there will be a change in the focus of Europe’s construction. Enough free market, limitless competition, enough austerity. I want a serious budget. I want to restore public accounts, which have worsened in the past five years. Austerity for life? No. A rigorous budget? Yes. I will renegotiate the treaty, Merkel knows it.”

‘Another Europe’

Hollande has said he’ll seek to add growth and investment measures to the fiscal treaty signed by Merkel, Sarkozy and 23 other EU leaders on March 2.

If he’s elected, his first visit will be to meet Merkel, so he can bring her “French people’s vote for another Europe,” Hollande said last night.

Merkel “is pretty resistant to pressure,” Altmaier said. France’s presidential vote and the Dutch government’s collapse don’t change the fact that “there’s no money in Europe, only deficits everywhere you look. Knowing the chancellor, she will await the outcome in France and then we’ll try to come to an understanding with the new government, whoever leads it.”

Hollande said the absence of economic growth prospects explained the record score for National Front leader Marine Le Pen in the April 22 first round of the French vote.

Anti-Austerity Front

Le Pen, who has called for France to leave the euro area and criticizes the close ties between Sarkozy and Merkel, won 17.9 percent, or 6.4 million votes, the highest tally for the National Front created by her father Jean-Marie Le Pen in 1972. Hollande got 28.6 percent and Sarkozy 27.2 percent.

Europe’s front against austerity has expanded in recent weeks after Spain struggled to meet EU-imposed deficit targets, election campaigns in Greece faced anti-austerity rumblings and the revolt against extra spending cuts in the Netherlands, a traditional German ally, pushed Rutte’s coalition toward an early breakup. The Netherlands is one of four remaining AAA states in the euro area.

For all the turbulence, “nothing has happened in recent weeks that would raise questions” about the need for area countries to overhaul their economies and cut debt, German Deputy Finance Minister Hartmut Koschyk said in an interview.

No financial backstop is big enough to arrest the debt crisis and hold down borrowing costs on its own, he said. “It doesn’t matter,” he said yesterday. “It is no substitute for structural reforms” because “the readiness of markets to tolerate out-of-control public debt has vanished.”

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