Merkel resists calls ...

Merkel resists calls to put growth before reforms

5/10/2012

* Merkel rejects calls for growth stimulus in Europe

* German opposition encouraged by French president-elect

* Domestic pressure on Merkel to ring-fence German savings

By Stephen Brown

BERLIN, May 10 (Reuters) - Chancellor Angela Merkel rejected calls from her centre-left opponents in Germany and Europe for economic stimulus policies that rely on new debt, warning parliament on Thursday that "growth on credit" would just tip Europe deeper into crisis.

Since the election of Socialist Francois Hollande as French president on Sunday, Merkel has come under pressure to relax the austerity measures that, as leader of Europe's biggest economy, she has prescribed

as the remedy for the euro zone debt crisis.

But Germany's centre-right leader, standing her ground, told the Bundestag (lower house of parliament) that reducing debt and encouraging growth were "twin pillars" of European policy, rather than alternative paths.

"Growth through structural reforms is sensible, important and necessary. Growth on credit would just push us right back to the beginning of the crisis, and that is why we should not and will not do it," said Merkel, who is expected to get a visit from Hollande next week on his first foreign trip as president.

Emboldened by Hollande's victory, Germany's centre-left opposition is calling for a "growth pact" for Europe to be added to the German-led fiscal pact for budgetary discipline which has been signed by 25 European Union countries but has yet to be formally ratified by many parliaments.

Speaking after Merkel, Frank-Walter Steinmeier, parliamentary leader of the Social Democrats (SPD), accused the government of "political lethargy" and said Germany had weathered the euro crisis well because previous governments had introduced "a blend of austerity and growth policies".

But Merkel has insisted since Hollande's victory that there is no alternative to the debt- and deficit-reduction programmes currently being demanded from countries like Greece in return for bailouts, if they are to return to sustainable growth.

"So much has been discussed, from to euro bonds to leveraging, they are all hailed as miracle cures then deemed unsustainable," Merkel told parliament. Hollande said just before his second-round victory that he wants to reopen the discussion on common euro zone bonds with Berlin.

"HORRENDOUS DEBT"

"The only sustainable path is to accept that getting over the crisis is a long, strenuous process which will only succeed if we tackle the causes of the crisis - which are the horrendous debt and the lack of competitiveness of some euro zone states," said Merkel.

Hollande threatened early in his campaign to seek a wholesale renegotiation of Merkel's "fiscal compact" to secure the inclusion of measures to foment growth and employment.

He later toned this down to make more modest proposals such as more financing for the European Investment Bank, European "project bonds" to fund infrastructure programmes, a financial transactions tax and better use of EU structural funds.

German officials say Merkel is not fundamentally opposed to any of these ideas, though she has her doubts about the project bonds if they involve raising any new debt.

The first talks between German chancellor and the new French president - who have never met - will be watched closely for any clues on how they can compromise to ensure continued cooperation between the euro zone's two biggest powers, as achieved with Hollande's conservative predecessor, Nicolas Sarkozy.

But Merkel will meet Hollande just after a strategically-important domestic vote in North Rhine-Westphalia, Germany's most populous state, where her Christian Democrats (CDU) look set to lose to the incumbent SPD and their Green allies.

In a heavily-indebted state, the election is being seen as a referendum on Merkel's austerity versus the SPD's message of the need for a greater focus on growth and job-creation.

"Voters have an opportunity to decide whether we continue to wade through this quagmire of public debt under the SPD and Greens or get out of debt with the CDU and head for innovative growth," said Peter Hintze, a senior CDU politician from NRW.

The Ifo economics institute in Munich voiced the concerns of many Merkel voters when it said in a research note that some EU countries wanted German taxpayers to finance their growth: "It is time for the euro periphery countries to start growing using their own savings."