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Merkel comes under increasing fire on euro crisis

As the German leader's austerity strategy loses backing, the OECD warns that the crisis threatens recovery throughout the world, including in the U.S.

May 23, 2012|By Aaron Wiener and Carol J. Williams, Los Angeles Times
  • French President Francois Hollande speaks with German Chancellor Angela Merkel during the NATO summit in Chicago on Monday.
French President Francois Hollande speaks with German Chancellor Angela… (Saul Loeb, AFP/Getty Images )

BERLIN — If it seems to German Chancellor Angela Merkel that the world is against her, she may be right.

Her insistence that debt-ridden European nations cut their way out of financial crises helped cost her conservative political party two state elections this month, exposed her to criticism as an inflexible taskmaster across the Eurozone and unleashed a torrent of anti-austerity venting that has toppled like-thinking national and regional leaders in France, Greece, Italy and elsewhere.

Guardians of the global economy are now also ganging up on the German leader.

On Tuesday, the Organization for Economic Cooperation and Development warned that the euro crisis threatens growth and recovery throughout the world, the United States included.

"The crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy," wrote OECD chief economist Pier Carlo Padoan, noting elections this month that brought Socialist President Francois Hollande to power in France and toppled a Greek government committed to taking the hard steps needed to stay in the Eurozone, the 17-nation bloc that shares the euro currency.

The head of the International Monetary Fund, Christine Lagarde, also called Tuesday for easing the debt burdens of the struggling Eurozone countries by issuing new bonds that would spread liability among all euro nations and bring down interest rates.

Merkel enters a lions den in Brussels on Wednesday night, when leaders of the European Union will gather to discuss the Eurozone's fiscal and political turmoil.

"I will outline all growth proposals at this informal meeting," Hollande told reporters Saturday after the Group of 8 meeting, where President Obama joined in pressing Merkel for growth measures in Europe. "Within this packet of proposals, there will be euro bonds, and I will not be alone in proposing them."

Hollande was referring to support for such bonds voiced by Italian Prime Minister Mario Monti and Prime Minister David Cameron of Britain, which is a member of the European Union but not the Eurozone.

Merkel appears unfazed by the chorus of calls to relent on the austerity focus.

Leveling out borrowing costs with joint-liability bonds would reduce the incentive for debt-ridden countries to put their finances in order, she believes. She has also opposed more aggressive intervention by the European Central Bank, which could cause the Eurozone to exceed its inflation targets.

For much of the last year, Merkel led the charge in imposing a tough regimen of fiscal discipline on the struggling nations of the Eurozone. Yet as the continent's economic crisis has dragged on, Merkel has seen her allies, most notably French President Nicolas Sarkozy, fall away one by one, either suffering electoral defeat or coming around to the need to balance austerity with growth.

"Merkel against the rest of the world," proclaimed a headline Monday in the German daily Sueddeutsche Zeitung, accusing her of exacerbating the crisis to appease domestic concerns.

A poll this month showed Merkel still has the approval of 61% of Germans, who remain wary of bold European intervention in the crisis that would see their tax dollars going to wayward neighbors.

But her stance has won few friends in countries where harsh deficit reduction has cut growth and boosted unemployment. In Greece, the hardest-hit country, a poll in February showed just 4% approval of Merkel, with more than three-quarters of Greeks agreeing that Germany was trying to establish a "Fourth Reich."

The German government has made some minor course changes in recent weeks. Finance Minister Wolfgang Schaeuble spoke in support of higher wages that would give Germans more money to spend on goods from neighboring countries. And the German national bank, the Bundesbank, said it would accept higher inflation to foster growth in the Eurozone.

"You already see that Merkel's making verbal compromises, rhetorical compromises," said Sebastian Dullien, senior policy fellow at the European Council on Foreign Relations in Berlin. But "I still don't see any imminent compromise on the really important issues, which are euro bonds or the debt redemption pact."

A German government official, speaking on condition of anonymity, downplayed Germany's supposed isolation, saying the French proposals drawing the most resistance from Merkel are long shots.

"Hollande knows that he's not going to be able to change the mandate of the ECB and he's not going to push through euro bonds, at least not in this decade," the official said. "Once you identify the bargaining chips and what he's really after, you end up with something really close to what we are looking for."

Areas of agreement in Brussels may include funding for infrastructure projects and increased lending for the European Investment Bank to support European businesses, both of which could boost growth.

If the crisis deepens and more decisive measures are needed, Merkel will come around to compromise on the bigger issues, Dullien believes.

"If you see a new turn of the crisis to the worse, I believe Merkel would move," he said. "That's how Merkel usually acts. She can be a little slow, but when things get bad, she moves."

carol.williams@latimes.com

Special correspondent Wiener reported from Berlin and Times staff writer Williams from Los Angeles.

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