Germany Resists Calls for ECB Aid in Euro Growth Dilemma

Wolfgang Schaeuble
German Finance Minister Wolfgang Schaeuble. Photographer: Ralph Orlowski/Bloomberg

German Finance Minister Wolfgang Schaeuble said deficit-fueled growth leads to economic decline, signaling discord with Italy and France as euro-area policy makers seek ways to avoid deflation and spur growth.

With France urging a stronger role for monetary policy to help spark its stagnant economy, Chancellor Angela Merkel emphasized the European Central Bank’s independence in a recent phone call with ECB President Mario Draghi, German government spokesman Steffen Seibert said today. The call was at Draghi’s request, Seibert said at a regular news briefing in Berlin.

German leaders are sharpening their tone as Draghi signals readiness to expand the ECB’s toolkit with quantitative easing and governments in France and Italy, respectively the second and third-biggest euro-area economies, chafe at Merkel’s insistence on debt reduction even as Europe’s debt crisis wanes.

Euro-area countries that pursued austerity policies in return for sovereign bailouts are “doing much better than all the others in Europe,” Schaeuble said at a town-hall event in Berlin yesterday. “That’s how it is with medicine: sometimes it tastes bitter for a while. But if it helps, that’s good.”

Draghi’s talk with Merkel followed his comment at Jackson Hole, Wyoming, in August that it would be “helpful” if EU governments with room to ease fiscal policy did so.

Conversations between Merkel and Draghi “are always guided by the spirit that the ECB’s independence is extremely important to us,” said Seibert. He declined to disclose details of the call, which was first reported by Der Spiegel.

Merkel Calls

Merkel called Draghi last week to seek clarity about his comments on stimulus spending, and the ECB chief defended himself by pointing out that he advocates structural reforms at the same time, Der Spiegel says in this week’s edition.

The magazine’s portrayal of Merkel demanding answers from Draghi “doesn’t reflect the truth,” Seibert said.

The ECB has reached its limit in combating the risk of deflation, Schaeuble said in a Bloomberg Television interview on Aug. 28. “Monetary policy can only buy time,” he said. “Liquidity in markets is not too low, it’s even too high.”

That contrasts with French President Francois Hollande, who told reporters in Brussels early yesterday that the ECB has a role in tackling Europe’s economic sluggishness. Italian Prime Minister Matteo Renzi has proposed that leaders of the 28 EU countries hold a summit on growth in October.

Debt Aversion

France’s economy has failed to grow in the last two quarters and the government in August tore up plans to reduce the budget deficit to 4 percent of output this year. Italy is in its third recession since 2008.

“Your economy won’t run better if you take up more debt,” Schaeuble said yesterday in Berlin. While economic stimulus leads to short-term growth, “things go downhill in the long term,” he said.

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