Fri, Jun 25, 2010 page10

• German finance minister warns of debt addictions

  DEFICIT While George Soros rejected budget tightening and said that Germany didn’t realize what it’s doing, the German minister insisted reining in debt was essential

  • AFP AND AP
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  German Finance Minister Wolfgang Schaeuble yesterday warned eurozone peers and the US not to get hooked on borrowing, as a war of words brewed ahead of a G20 summit in Toronto.

  “Governments should not become addicted to borrowing as a quick fix to stimulate demand,” Schaeuble wrote in an op-ed piece printed in the Financial Times and Handelsblatt newspapers.

  “Deficit spending cannot become a permanent state of affairs,” he stressed.

  Germany has been singled out by officials in Europe and the US for failing to boost domestic demand, and billionaire investor George Soros warned on Wednesday that the euro could fail because of decisions by German authorities.

  Forcing Europe’s governments to slash their budgets could push the continent “into a period of prolonged stagnation or worse,” Soros said in Berlin. “That will, in turn, generate discontent and social unrest.”

  Coming at a time when the Chinese authorities have also put on the brakes, slashing the deficits “could push the global economy into a slowdown or possibly a double dip,” Soros warned.

  “Unfortunately, Germany doesn’t realize what it’s doing,” he said.

  Should the European countries go forward with a coordinated effort of budget tightening, the result could be deflation, which would draw weaker countries deeper into recession and set off a spiral that would ultimately lead to even deeper budget cuts, he said.

  Soros sharply criticized Germany’s obsession with debt reduction and said Chancellor Angela Merkel’s government is now treating the Maastricht treaty as “the gospel which has to be obeyed without any modification.” The treaty imposes the 16 countries sharing the euro currency a maximum limit for their budget deficit and the overall debt burden.

  “Now these countries are expected to return to the Maastricht criteria even if such a move sets in motion a deflationary spiral,” he said in a speech at Berlin’s Humboldt University.

  But Schaeuble said there was just one reason for recent turmoil in the 16-nation bloc: “Excessive budget deficits in many European countries.”

  Acknowledging that Germany found itself the focus of “one of the most passionately debated economic issues of the day” the finance minister replied with “an emphatic no” to the question of whether Berlin was acting prematurely in reining in its deficit.

  The issue is likely to be high on the agenda at a meeting of the G8 and G20 developed and developing economies in Toronto today and tomorrow.

  Schaeuble underscored that Germany still had an expansionary budget this year “unlike most of its European peers,” and said Berlin was hardly “slamming on the brakes” with a “controlled and measured approach to reducing our deficit.”

  He described Germany’s path as “expansionary fiscal consolidation.”

  Some economists have pointed out that such consolidation can actually boost growth, especially in countries with excessive state spending and deficits.

  Germany managed to essentially balance its budget in 2007 and 2008 before increased spending to battle the recession saw its public deficit exceed the 3 percent EU limit last year.

  The German government has said it would try to cut at least 80 billion euros (US$99 billion) from the budget by 2014, including more than 11 billion euros next year.

  It has also passed a “debt brake” law that binds Berlin to a balanced budget again by 2016 at the latest.

  “The German government knows it has a responsibility to promote growth in Europe and the world. We will rise to it not by piling up public debt but by fulfilling our traditional role as an anchor of stability,” Schaeuble wrote.
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