Germany Signals Austerity Leeway in Budget-Rule Flexibility

A German Finance Ministry official said that budget-cutting rules must allow for flexibility, opening a chink in Chancellor Angela Merkel’s austerity-first policy as the only course to rescue Europe from its debt crisis.

Rules governing how the euro area’s 17 members scale back deficits are not absolute and must respond to a shifting economic outlook, Deputy Finance Minister Steffen Kampeter said. He was responding to comments by European Commission President Jose Barroso that the path of austerity had reached its limits.

“The rules aren’t rigid,” Kampeter said in an interview today in Berlin. “Rather, they say that we have to continue on the path of consolidation. In the end they’re very, very strict, but of course they react to exogenous shocks.”

The remarks by the German finance official responsible for fiscal policy suggest a recognition in the Merkel government that a further softening of targets is required to reflect the economic reality of a euro area facing record unemployment and a second year of recession.

The euro rose after the news broke before erasing its gains. The single currency was little changed at $1.2995 as of 2:30 p.m. in Berlin.

For all the talk of granting a little fiscal flexibility, German elections in less than five months mean that Merkel cannot afford to relent on her central drive for structural reform to make Europe more competitive. Illustrating the fine line she faces, Merkel’s allies in parliament bridled yesterday at the suggestion of loosening austerity.

No Deviation

“Germany will only give countries more time to reach budget-deficit limits if their overall policy is intact and will achieve fiscal balance,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. “Merkel won’t allow countries to deviate from addressing the structural fiscal deficit and she’ll stand firm on labor-market restructuring and reject any big stimulus spending.”

Kampeter signaled that Germany would leave the determination on how to be flexible in altering or extending countries’ rescue programs to the commission in Brussels.

“It’s up to the Commission to evaluate this and not for Germany to give a premature judgment,” Kampeter said.

Barroso told an audience in Brussels on April 22 that European leaders’ focus on budget cutting, while “fundamentally right,” had run its course and needed to be moderated. “We are reaching the limits of the current policies” as a sputtering economy requires more flexibility and growth measures, he said.

‘Fine Tuning’

While Barroso didn’t back off EU-mandated limits for member states’ budget deficits, he said multiple components are needed beyond fiscal discipline to spur growth in troubled economies. He also touted extensions given to Ireland and Portugal to pay back emergency loans as an instance of “fine tuning” bailout programs tailored to countries’ needs.

The commission president’s comments captured renewed criticism of Germany’s austerity agenda, as Group of 20 allies and the International Monetary Fund pressed Merkel to take heed of the persistent economic turmoil three years after Greece became the first euro state to ask for an international bailout.

While Merkel has acceded to fiscal slippage before, she has little room to manoeuver as she seeks a third term on Sept. 22 as polls show voters overwhelmingly in favor of her crisis-policy to date.

Latest Poll

Support for Merkel’s coalition of her Christian Democratic bloc and its Free Democratic partner held at 47 percent for the third week in a Forsa poll for Stern magazine, enough for a rerun of her current government. The main opposition Social Democrats gained 1 percentage point after their party convention to 23 percent, while their Green party allies dropped a point to 14 percent in the weekly poll released today.

The Left Party had 7 percent in the poll of 2,504 voters conducted April 15-19. A newly formed anti-euro party, AfD, had just 2 percent, below the 5 threshold to win seats and within the 2.5 percentage point margin of error.

Even as bond yields fell to records across the euro area yesterday, the crisis continued to resonant in Germany. Norbert Barthle, a legislator who is the budget spokesman for Merkel’s Christian Democratic Union in the lower house, or Bundestag, issued a statement responding to Barroso’s remarks, saying they “upset me greatly.” Hans Michelbach, a lawmaker with Merkel’s CSU Bavarian sister party, told Handelsblatt newspaper the comments contravened the position of European finance ministers and heads of government “send absolutely the wrong signal.”

Barroso Misunderstood

Kampeter told an audience in Berlin today that Barroso’s speech had been misunderstood, and that the commission president didn’t mean that budget negotiations would be re-opened.

Merkel’s chief spokesman, Steffen Seibert, told reporters that there were “no differences at all” between the government and Barroso on the prescription to Europe’s ills.

“At first sight, comments like we’re hearing from the IMF or Barroso make it sound like we’re supposed to fundamentally change course,” Michael Huether, head of the Cologne Institute for Economic Research, said in an interview. In fact, granting more leeway on timelines to meet austerity targets, as has been done for Portugal, “are details of implementation that don’t undermine the actual goal and concept,” he said. They are also something to be done at European level and not in Berlin, he said. “I’m in favor of flexibility, as long as it’s clear that we don’t diverge from” fiscal discipline.

Merkel has given no indication of a willingness to reconsider austerity. She instead redoubled her defense of consolidating budgets in several speeches over the past week, dismissing the notion of debt-fueled spending as compounding the problem of excessive deficits.

“Saving is not an end in itself,” Merkel said in a speech in Frankfurt today. “It’s fundamentally about whether one day we can live from what we take in” without excessive borrowing. “It’s about whether we’re being competitive, if we can sell our products, and if we have jobs for our citizens.”

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