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Germany bares teeth as EU broaches stimulus spending

  Germany flatly rejected pressure on Monday to do more for Europe’s battle against recession, vowing not to be lured into a “senseless” public spending contest that could unravel years of work to balance its books.

 

The message was delivered by German Chancellor Angela Merkel and relayed by Finance Minister Peer Steinbrueck when euro zone finance ministers met to discuss proposals that the European Union inject €200 billion ($252 billion) into the economy. “We will not take part in a competition to outdo one another with an endless list of new proposals, in a senseless contest over billions,” Merkel said. That looked like a barb largely directed at French President Nicolas Sarkozy, who last week publicly vented his frustration with Berlin’s recession response, saying: “While France is working, Germany is thinking.”

Steinbrueck told reporters that Germany had already unveiled two plans worth €31 billion, or 1.25% of its gross domestic product (GDP), to tackle the downturn. “That is apparently not being registered by many who are observing us. Furthermore, we are not obliged to copy what all other countries are doing,” he said.

The European Commission, the EU’s executive body, proposed last Wednesday that governments spend an extra 1.2% of GDP from their budgets, mainly in 2009, to boost investment and consumer demand and thus limit the downturn. Finance ministers from the 15 euro zone countries met for a first collective look at the idea in Brussels on Monday evening and were due to widen talks on Tuesday to ministers from all 27 EU nations.

The only clear result from Monday’s meeting was that none of the euro zone countries would opt for reductions in VAT sales tax, a strategy being adopted by Britain, which is in the EU but not the euro currency bloc. Of the €200 billion that the Commission proposed, 170 billion would come from governments and the rest from the EU’s lending arm, the European Investment Bank. Governments are currently hatching plans bit by bit. Britain is cutting VAT in the run-up to the Christmas and year-end gift-buying season as part of a £20 billion ($29.7 billion) stimulus package.

France is to unveil its own stimulus plan, worth around 1% of gross domestic product or €19 billion, this week. Italy and Spain are also announcing spending plans of one kind or other that they hope will prevent the recession getting deeper and lengthier than so far anticipated. France, the euro zone’s second-biggest economy after Germany, has hit the EU’s budget deficit ceiling of 3% of GDP and wants Berlin to commit more. Higher German demand helps other EU members via the common market for goods and services.

Jean-Claude Juncker, Luxembourg prime minister and chairman of the Monday talks among finance ministers, said VAT cuts were not being supported as a remedy among those in the euro zone and that the standard rate of VAT would not be lowered. The stress where possible should be on public investment, he said, adding that it was now imperative the governments do what they could to shore up the economy because central banks could not work miracles by cutting interest rates. “We all agree that monetary policy cannot provide an adequate response to the crisis so we need to provide a strong fiscal response,” Juncker told a news conference.

“LEMMINGS”

Steinbrueck defended Berlin’s stance in media interviews ahead of the talks as well as on arrival in Brussels. “Just because all the lemmings have chosen the same path, it doesn’t automatically make that path the right one,” he told Der Spiegel in an interview. “That does not mean the Germans have to buy into every European suggestion if they can’t see what it will do for the economy. Especially, as Germany always ends up having to pay the most.”

Germany has said its own plan is already more than the Commission proposal would demand of it. A senior German government official, speaking on condition of anonymity, said it was possible that the German government would end up distributing short-term spending vouchers to support consumer demand.

Poland, an EU country set on joining the euro and which announced its own €24 billion stability and growth package over the weekend, sided with Berlin’s message of fiscal prudence, pledging its budget deficit next year would not increase as a result of the plan. (Reuters)