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Germany, France join efforts to boost growth
Reuters
Merkel poses with Hollande at the Chancellery in Berlin.
Merkel poses with Hollande at the Chancellery in Berlin.
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BERLIN: Germany and France understand their joint responsibility for Europe and must offer joint ideas at an EU summit next month on reviving economic growth, Chancellor Angela Merkel said Tuesday after talks with France’s new president.

“It will be very important that Germany and France present their ideas together at this summit and work closely together to prepare it,” Merkel told a joint news conference with Francois Hollande, hours after he took the oath of office.

Hollande said Europe should consider all possible measures that could spur economic activity and growth.

Hollande, who wants to temper Berlin-led austerity policies with pro-growth measures, said he and his German counterpart both wanted Greece to remain in the eurozone and hoped voters there would show they did too in a June 17 election.

“I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity so that there is a return to growth in Greece,” Hollande said. “On growth, the method that we agreed is putting all ideas and all proposals on the table and seeing what legal means exist to put them into effect.”

Greece headed Tuesday into a new month of political uncertainty after power-sharing talks collapsed, triggering new elections that could determine whether the country retains its cherished position in Europe’s currency.

Germany pulled the eurozone’s economy back from the brink of recession at the start of 2012 but stagnation in France and contraction in southern Europe underlined sharply differing fortunes in a bloc laboring under the effects of austerity.

Overall gross domestic product was unchanged in the first quarter following a dip at the end of last year, data showed Tuesday, meaning that the eurozone missed slipping officially into recession by the narrowest possible margin.

But a surprisingly strong showing from Germany, whose exporters are helping it to cope with the eurozone crisis, flattered dismal performances in most of the other major economies.

“Germany is leading the bloc, but this doesn’t mean we will have a strong rebound. Austerity is not going away and southern European economies are really struggling,” said Mads Koefoed, a senior economist at Saxo Bank. “We are looking at stagnation to very mild growth in the year to come.”

Most eurozone governments are imposing austerity policies, often at great cost to their electorates and the chances of economic growth, hoping to counter the debt crisis by cutting their budget deficits. Hollande headed to Berlin Tuesday to argue for adding measures to boost growth.

Tuesday’s data showed a two-speed eurozone, with Italy’s recession deeper than feared and Greece suffering something akin to a depression.

“There’s a growing divergence in the eurozone, with particularly sharp contractions in the peripheral countries that need to do the most structural reforms, while Germany is the outperformer,” said Joost Beaumont at ABN Amro in Amsterdam.

GDP in Germany, Europe’s biggest economy, rose 0.5 percent on the quarter, confounding expectations of a more modest rise and lifting the rest of the 17-nation currency bloc.

While the eurozone’s stagnation offered little cheer, it was still better than the 0.2 percent contraction most economists had expected. Two successive quarters of falling GDP would have marked the second recession since 2009.

Germany’s strong showing initially bolstered markets which were battered Monday by growing fears that Greece will deepen the crisis by leaving the eurozone. France, the eurozone’s second largest economy, reported no expansion in the first quarter.

“There was no good surprise,” said Philippe Waechter, chief economist at Natixis Asset Management of the French data. “There was weak consumption, no investment.”

Hollande, who is due to attend his first EU summit in Brussels next week, said he would urge his peers to back a pact that coupled the goals of deficit reduction with economic stimulus. But Italy’s weaker-than-expected output epitomised southern Europe’s anaemic economies.

Italy’s heavily indebted economy shrank more than expected in the first quarter, with GDP falling 0.8 percent and marking the third consecutive quarter contraction.

After a decade of falling productivity in Italy, the debt crisis has highlighted how barriers to competition, heavy regulation and bureaucracy are dragging on the economy, discouraging investment and prosperity.

Data two weeks ago showed Spain, which is struggling to reduce a huge deficit and rebuild its banking sector following a burst property bubble, is already in recession, after GDP shrank 0.3 percent in the first quarter.

Even in the wealthy Netherlands, economic output contracted for a third consecutive quarter, shrinking 0.2 percent in the first quarter of 2012 compared with the previous three months, underscoring just how damaging the crisis has become.

EU leaders have been unable to find a way back to growth, while many southern Europeans are turning against the austerity measures, holding huge street protests in Madrid and backing radical political parties in the Greek elections.

Hollande wants new growth measures and while German Chancellor Angela Merkel has not disagreed in principle, she is unlikely to accept anything that increases government debt.

Italian Prime Minister Mario Monti is also pressing for a growth strategy. He won support from an unlikely source when credit ratings agency Moody’s sharply downgraded 26 Italian banks, saying budget-cutting measures and an Italian recession had hit demand and increased the level of bad loans.

A hefty defeat for Merkel’s conservatives in a German state election Sunday, meted out by the Social Democrats who have argued against austerity for austerity’s stake, will add to the pressure on the chancellor.

World stocks dropped and the euro fell to a four-month low against the dollar Tuesday.

Gold touched a four-and-a-half-month low, with the euro’s weakness unnerving investors over the profitability of holding euro-denominated assets.

The euro fell for the fifth of the last six sessions on chances left-wing politicians opposed to Greece’s international bailout could win the June elections. The euro last traded down 0.5 percent at $1.2761, with the session trough at $1.2752, the lowest since Jan. 18.

The MSCI world equity index fell 0.8 percent, while the FTSE Eurofirst index of top European shares ended down 0.7 percent.

U.S. stocks were lower, with the S&P 500 index hitting a three-month low in late trading. Early losses were limited by positive economic data on U.S. regional manufacturing and national homebuilder sentiment.

The Dow Jones industrial average was down 66.26 points, or 0.52 percent, at 12,629.09. The Standard & Poor’s 500 Index was down 7.65 points, or 0.57 percent, at 1,330.70. The Nasdaq Composite Index was down 2.35 points, or 0.08 percent, at 2,900.23.

 
A version of this article appeared in the print edition of The Daily Star on May 16, 2012, on page 6.
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