The World From Berlin Europe's 'Unloved Stability Pact'

'Spend, spend, spend' is the maxim adopted by many European governments during the economic crisis. But splurging comes at a high cost: debt. German pundits on Thursday asked how much debt is a good thing.


Is it prudence or political misjudgement? Sharp criticism is being fired at Chancellor Angela Merkel for not doing enough to bolster the spluttering German economy. This week Nobel-prize winning economist Paul Krugman joined the fray, saying in an interview with SPIEGEL that Merkel and Finance Minister Peer Steinbrück were "failing to appreciate the severity of the slump" and were "wasting crucial time."

European Central Bank President Jean-Claude Trichet has a lot on his mind these days.
REUTERS

European Central Bank President Jean-Claude Trichet has a lot on his mind these days.

Amid the pressure, Merkel said on Tuesday she was planning a new round of stimulus measures, reigniting the national debate on how the euros should be best spent. Press reports have said Berlin is gearing up to pour another €30 billion ($42 billion) into Europe's biggest economy. The package would follow a stimulus program passed in November. That package, advertised as being worth €32 billion, has been widely panned for including few measures that hadn't already been agreed on.

Reflecting fears of a prolonged downturn, German Labor Minister Olaf Scholz will on Friday host a crisis meeting with the bosses of the 30 companies listed in Germany's blue-chip DAX index.

But building up debt via expensive bailout plans does not come easily to Germany, which has worked hard to reduce its public deficit. The country's deficit is now well within rules imposed on those countries part of the euro single-currency zone. Rules require countries to have a deficit worth less than 3 percent of their gross domestic products. German officials are wary of transgressing that limit by indulging in massive spending programs.

Meanwhile, a number of European neighbors are arguing that now is the time to loosen the stringent rules of the stability pact. Thursday's Süddeutsche Zeitung cited European Union sources saying that France, Italy, Greece and Ireland all want to relax the limits. German editorials on Thursday agreed that swift action is needed to aide the economy but took differing stances on the merits of stability versus splurges.

The business daily Handelsblatt writes:

"In recent years, economic stimulus packages were rightly shunned because they boost debt. It is simply too high a price to pay during a normal downturn. But the current recession is no normal downturn -- rather the consequence of the steepest slump in demand since World War II. That definitely justifies boosting investments as far as is possible. The credit is rewarded in the form of roads and new buildings and the outlay is a one off."

"But it is harder to see the value in handing money to consumers. Is it really worth it to take on more debt in order to provide a round of consumer vouchers? Is it worth it to cut taxes, thus pushing the state's incoming funds permanently into the red? It is well possible that given the limited effect of such measures, the cost turns out to be simply too high."

The center-left Süddeutsche Zeitung writes:

"It would be wrong to simply give up on the stability pact in the face of the crisis, as France, Italy and other usual suspects want. The euro zone has weathered the financial crisis as well as it has because it is seen as a refuge of stability -- not a group of debtors."

"It was to be expected that some governments would attack the unloved pact which Germany once forced on Europe. Many politicians want to have a free hand when it comes to spending money. They are annoyed by the European requirement that in normal times new debts should be limited to a maximum of 3 percent of the economy's performance. Their displeasure does not change the fact that this rule is right, because in a currency block the debts of one member become a burden on all members. Germans shouldn't suffer because of spendthrift Greeks, nor should Greeks face the cost of splurging Germans. Only if all states have solid economies will the euro remain intact and continue to have such a beneficial effect as it is seeing in the financial crisis at the moment, where it prevents speculative attacks on individual countries' currencies -- something which would boost the chaos."

"The arguments of the pact's detractors are wrong -- the rules are flexible enough to permit more spending during exceptional times, as is necessary at present. The German government must stand firm."

Left-wing Frankfurter Rundschau writes:

"Everyone knows that a supplementary budget is needed. But the government continues with its vehement denials and is basing its figures on assumptions of growth which even it no longer believes in. Debt is leaping to unforeseen heights. Finance Minister Steinbrück is using all his power to fight the inevitable and is wasting the opportunity to use political action to soften the downturn. At the end of the day Steinbrück will have a similar experience (to his predecessor) -- the budget will be ruined and the economy paralyzed."

-- Jess Smee; 2:30 p.m. CET

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