Europe's German growth locomotive on strike

Sun Sep 28, 2014 4:45am EDT
 
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By Paul Taylor

PARIS (Reuters) - Europe's growth locomotive is on strike.

With the euro zone economy stuck in a rut despite European Central Bank efforts to pump money into the system, pressure is mounting for Germany to use its healthy budget position to boost public investment, stimulate demand and spur growth.

The answer from Chancellor Angela Merkel so far is an adamant "nein", spelled out firmly to visiting French Prime Minister Manuel Valls last week.

If her refusal is final, rather than a tactic to extract more reforms from European partners, it could dash the prospects of a three-way grand bargain sketched by ECB President Mario Draghi to revive the European economy.

That could tip the euro zone back into another recession, worsen unemployment and fuel political radicalism.

The International Monetary Fund, the ECB, the European Commission, the United States and euro zone partners are all pleading with Berlin to use what economists call its "fiscal space" to stimulate the economy through tax cuts and investment in aging road, rail, energy and telecommunications networks.

German officials acknowledge privately that the country has an investment gap, both public and private. It spends less than half as much of its economic output - just 1.6 percent - on public investment as France or Sweden, less even than Greece.

Yet the government is determined to stick to its balanced budget strategy, moving faster into surplus than planned, even though its own economy shows signs of slipping into the stagnation already gripping France and Italy.   Continued...

 
A huge euro logo is pictured next to the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014.  The European Central Bank left interest rates unchanged on Thursday, holding off fresh policy action as it prepares to launch fresh funding for banks next month that it hopes will lift inflation from rock-bottom levels.     REUTERS/Ralph Orlowski  (GERMANY - Tags: BUSINESS POLITICS) - RTR41KE0