Germany defends austerity measures, rejects accusation of threatening the global recovery

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Germany defends budget cuts ahead of G-20 summit

BERLIN — Chancellor Angela Merkel vowed Thursday to defend Germany’s planned austerity measures at this weekend’s G-20 summit as she shrugged off U.S. concerns that budget cuts could threaten the global economic recovery.

“We, the Europeans and the Germans in particular, think that reducing the deficits is indispensable for achieving sustainable growth,” the chancellor told journalists.

Merkel’s government has pledged to save €80 billion ($100 billion) by 2014 by cutting welfare benefits and raising new taxes. But U.S. President Barack Obama has urged leaders to refrain from pushing through austerity plans in a bid not to threaten the recovery.

Merkel acknowledged that there are differences “about the philosophy, the approach of how to overcome the financial crisis,” and said she expects discussions at the summit of the world’s wealthiest nations plus emerging economies in Toronto to be “fruitful, but very controversial.”

Merkel points to Germany’s dropping jobless rate — 7.7 percent in May — and other indicators of positive growth in insisting that reducing the deficit is the right thing for her country, Europe’s biggest economy.

The chancellor told ARD public broadcaster earlier in the day that she had explained to Obama in a telephone call earlier this week that the stimulus measures amount to more than 2 percent of gross domestic product in the current budget and that “Germany has done much more to revive the global economy than most other nations.”

Finance Minister Wolfgang Schaeuble echoed Merkel’s tough stance in an editorial published in German daily Handelsblatt and the Financial Times.

“Governments should not become addicted to borrowing as a quick fix to stimulate demand. We need carefully considered exit strategies,” he said.

Schaeuble openly hinted that there is a rift between the U.S. and Europe as economic policy makers on both sides of the Atlantic are taking a fundamentally different course. While the U.S focuses on short-term corrective measures, “we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.”

The U.S. budget deficit in 2009 totaled 9.9 percent of GDP, according to the Congressional Budget Office. Germany, in turn, had cut its budget deficit to zero in 2008 but saw it rise to 3.1 percent last year in the wake of the global financial crisis.

The government says this year’s deficit will be above 5 percent, but it has pledged to get back below 3 percent by 2013.

But some experts caution Germany should not try to cut spending at a time when other, more indebted countries, such as Greece, Spain and Portugal, are already doing so.

U.S. billionaire investor George Soros on Wednesday in Berlin warned that Germany’s insistence on fiscal tightening could initiate a “a period of prolonged stagnation or worse,” leading to widespread “discontent and social unrest” that could endanger the European Union.

But German economists have largely applauded the government’s move as a return to fiscal orthodoxy.

“The economy at the moment is so strong that it can stand the moderate planned consolidation effort,” Ulrich Kater, chief economist at Germany’s Deka Bank, said.

“The events on the financial markets showed a lot of countries in the eurozone that their amount of debt has reached the limit of sustainability,” Kater added, noting that the U.S., due to its size, can afford higher deficits.

Following a meeting of the G-8 starting Friday, the G-20 nations will meet on Saturday and Sunday in Toronto.

Shortly before her departure to Canada, Merkel said she expected the leaders to act to ensure that all financial products, trading places and market actors will be regulated in the future to prevent a repeat of the financial crisis.

She acknowledged, however, that summit participants are unlikely to agree on all proposals of how to get the financial sector to participate in shouldering the costs of the crisis, for example by introducing a bank levy.

An agreement on a global tax on financial transactions at the summit seems unlikely, she said. “But I would prefer to have a clear answer than no answer, because then we can try to go our own way on a European level,” she added.