Germany widens eurozone split over austerity

New rifts pitting supporters of spending-fuelled growth against proponents of fiscal austerity have opened at the highest levels in Europe, as France and Germany choose to tread different paths on an issue central to the union’s economic health.

Germany has given its strongest indication yet that a balanced budget is its paramount objective. Finance minister Wolfgang Schäuble promised this week that his 2014 budget would include €5 billion in additional spending cuts, helping Europe’s largest economy balance its budget in 2015, a year ahead of schedule.

Schäuble’s determination to slash spending, coming during a week that included a summit of Europe’s leaders and a conclave of the eurozone’s 17 finance ministers, put France on the back foot.

France’s president François Hollande warned this week that the socialist government, which campaigned on a pro-growth platform, would miss its 2013 budgetary targets “by a significant margin”. Hollande’s determination to blend austerity with a higher measure of stimulus chimed with his stance that the continent should not remain forever a “Europe of austerity”, appeasing global investors at the expense of promoting underlying growth.

Leaders of EU countries meeting in Brussels yesterday morning avoided a clash by issuing a communiqué that included the need for both continued fiscal consolidation and more efforts to stimulate growth, that allowed both sides to claim victory. “Particular priority must be given to supporting youth employment and promoting growth and competitiveness,” it said. “Substantial progress is being made towards structurally balanced budgets and that progress must continue.”

Investors are growing increasingly jittery over France’s mounting debt and weak growth. Hollande announced this week that France’s budget deficit would reach 3.7% this year, despite pledging to narrow the gap to 3%. Berlin widened the growing rift with Paris by noting that a widening budget deficit sends a “bad signal” to the markets and to fellow eurozone members.

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Analysts were divided over the conflict. Jörg Krämer, chief economist at Commerzbank, portrayed Germany’s determination to balance its books as an “absolutely necessary” move designed to send a signal to more heavily indebted fellow eurozone members. But others dismissed it as a political move designed to appeal to fiscally prudent voters in the run-up to September federal elections. “It is Germany that has suddenly decided to take a different path [to everyone else],” said Gilles Moec, co-head of European economics research at Deutsche Bank.

“What they are doing is at odds with the gentleman’s agreement done so far” with other eurozone members, Moec added. “And why have they done it? Because it’s a German election year, and fiscal prudence and book balancing is a vote-winner in Germany.”

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