German Chancellor Angela Merkel hit back yesterday at those, including the United States, urging Europe to introduce new economic stimulus packages to boost demand and spend its way out of the crisis.
“We need to combine economic growth with solid public finances. We are not in favour of new stimulus programmes,” said the Chancellor.
“The idea that you need to boost growth by taking on ever greater debt is the wrong idea. I am deeply convinced of that,” she said.
US officials have repeatedly called on European leaders to introduce further stimulus into their slow-growing economies in a bid to tame a crisis that President Barack Obama said on Monday is “scaring the world.”
Ms Merkel also called for greater efforts to push forward the stalled Doha round of global trade liberalisation talks, saying it would be “one of the cheapest economic stimulus packages”.
In a speech to business leaders in Berlin, Ms Merkel insisted that the current crisis in the eurozone was not related to the common currency, but rather to the huge debt piles accumulated by euro area members.
“We don’t have a euro crisis, but a debt crisis,” said Ms Merkel.
She urged the assembled business elite to realise that “Germany is profiting from the euro”, with around 70 per cent of the exports from Europe’s top economy going to the 17-nation eurozone.
Merkel met Greek Prime Minister George Papandreou late yesterday and stressed that Athens needed to restore market confidence in its ability to enact the necessary reforms to tackle the crisis.
Mr Papandreou earlier told the same conference that Greek politicians and the people were making “superhuman” efforts to get on top of the crisis but warned that it would take time.
Ms Merkel faces a much-anticipated vote tomorrow on boosting the EU rescue fund used to bail out Greece that could well touch off another political crisis in Germany.
While the legislation is certain to pass – the opposition has vowed to vote in favour – Ms Merkel faces the humiliation of having to rely on them because of a threatened backbench rebellion.
She said it was “of the utmost importance” that the legislation was approved. Just eight of the 17 eurozone states have so far ratified the new EFSF powers agreed at a July summit.
In addition, she repeated her opposition to the pooling of debt in the eurozone, which some experts have suggested as the best way out of the crisis, but which many Germans feel would be the start of a slippery slope to fiscal indiscipline.
During his speech, Mr Papandreou hit out at Greece’s critics, saying that to single out Athens for “punishment and scorn” was anything but constructive as he addressed a conference organised by German employer federation BDI ahead of his meeting with Ms Merkel.
“If people feel only punishment and scorn, this crisis will not become an opportunity, it will become a lost cause. And we are determined to make this a success,” the Greek leader said.
Pillorying Greece was “frustrating not only at a political level, where a superhuman effort is being made to meet stringent targets in a deepening recession, but frustrating for the Greek people who are making these painful sacrifices and difficult changes”.
It is going to take “years to make these major changes”, he said, adding: “We are simply asking for respect for the facts”.
Greek Finance Minister Evangelos Venizelos meanwhile said in Athens that the payment would be made “on time” in October.
“It is ridiculous to say that Greece or a European country will go bankrupt,” Mr Venizelos said on his return from Washington where he attended meetings of the IMF and the G20.
Greek authorities say they need the €8 billion to continue paying the bills, amid growing social unrest and increasing speculation that the country will default and plunge the euro even deeper into crisis.
Officials say Greece may announce a number of privatisation deals this week as the debt-hit country comes under increasing pressure from its creditors to meet tough fiscal targets.
“I can guarantee that Greece will live up to all its commitments. I promise you we, Greeks, will soon fight our way back to growth and prosperity after this period of pain,” Mr Papandreou insisted.
The Greek leader said decisions made by European leaders on July 21 to expand the scope and size of the EU’s rescue fund were “steps in the right direction”.
“For Greece it gives us the breathing space for our reforms to yield results,” he said.
To sustained applause, he said he would not take domestic political pressure into account in his efforts to solve the crisis.
“What many ask me, is ‘but do you have the support?’ Whether I am re-elected or not is not my problem, my problem is to save the country,” he said.
He compared the efforts Greece is undergoing to the rebuilding of the former communist East Germany after German reunification.
“The fall of the Berlin Wall heralded the end of division in Europe. Now is not the time to rebuild walls in Europe,” he said.
Stock markets around the globe rallied sharply yesterday amid hopes European leaders will finally get a grip on the long-running crisis which is threatening the euro project.