By Bertrand Benoit in Berlin and Nikki Tait in Brussels
Published: November 26 2008 23:11 |Financial Times
Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the US and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years.
“Excessively cheap money in the US was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”
There have been calls from outside Germany for it to beef up fiscal support, but Ms Merkel has been wary of raising public borrowing to stimulate demand, fearing that the extra income could boost Germans’ savings rate, which is already high.
The chancellor defended her government’s modest fiscal stimulus – worth €12bn over the next two years – as a “measured and proportional response . . . tailored to the situation”.
Ms Merkel’s comments came as the European Union proposed a €200bn economic stimulus plan aimed at avoiding a deeper recession through tax and infrastructure plans. There were immediate doubts as to whether member states would back the measures.
The proposals envisage the EU’s 27 states contributing about €170bn with the European Commission and the European Investment Bank providing the remaining €30bn, partly through accelerated spending programmes.
Economists and politicians quickly questioned whether all member states would step up as required, or whether individual governments’ responses would diverge from the Commission’s suggested measures.
“Angela Merkel and other conservative leaders such as [Italian premier Silvio] Berlusconi may well water down the plan and refuse to make the necessary national investments,” said Poul Nyrup Rasmussen, the former Danish prime minister who heads the Socialist party in the European parliament.
The larger-than-expected package represents about 1.5 per cent of EU gross domestic product. It must be reviewed by finance ministers and by government leaders in mid-December.
Analysts at Capital Economics, the consultants, said: “The proposed boost has yet to be agreed by member states and would sadly not do enough to bring European economies out of the gloom for some time anyway.”
Business Europe, the main business lobby group in Brussels, agreed with the proposals but said a “clear commitment from EU member states” was needed to implement stimulus packages of at least 1.2 per cent of GDP.
The proposal failed to impress investors, with most stock markets in Europe trading lower.
A European slowdown was one of the factors contributing to a decision by the Chinese authorities to slash interest rates by 108 basis points, the biggest cut in a decade. The move reflects concern about a weak housing market and declining export demand.