By JACK EWING
OCT. 16, 2014
Mario Draghi, president of the European Central Bank, has pressed German Chancellor Angela Merkel to spend more on public works to stimulate the eurozone economy. CreditFrancois Lenoir/Reuters
FRANKFURT — Remember Europe?
You know — the place with the common currency that almost fell apart two years ago because of trouble in Greece, prolonged recession and fighting among political leaders over the best way out of the mess.
Until a few days ago, international investors seemed to have forgotten that there was ever anything wrong on the Continent, as they lined up to buy bonds from Spain, Italy and even Greece that they once shunned. But the recent sell-off in global stock markets seems to have revived repressed memories.
Many of the problems that nearly tore the eurozone asunder two years ago remain unresolved. And there are some new ones to worry about, including the conflict in Ukraine, persistent fears of deflation and a sharp rise in support for right-wing populist parties that would like to throw the euro on the junk heap. This time, Germany — usually the eurozone’s biggest economic force, but now stumbling — seems to be the focus of fear, loathing and blame.
Just when eurozone leaders should be pulling together, there seems to be a widening rift between the European Central Bank and leaders in Germany, which has the region’s largest economy and an outsize influence on the direction of the currency bloc. Simultaneously, a chill has set in between French and German leaders, whose ability to get along has always been indispensable to European crisis management.
Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budget discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on. German leaders have resisted, while making clear their opposition to the more powerful stimulus measures that analysts expect the E.C.B. to deploy soon.
No wonder international investors are rattled. They fear that European leaders are farther apart than ever on how to pull the region’s economy out of its long slump — and that the European Central Bank will not have the freedom it needs to take the extraordinary measures needed to stave off another crisis.
“German resistance against the E.C.B. pursuing more aggressive policy is one of the things spooking markets,” said Holger Schmieding, chief economist in London at Berenberg, a German bank.
Corporate leaders are worried, too. German manufacturers, whose exports of cars and machinery have helped prop up the whole eurozone, are increasingly concerned that the global economy is deteriorating and that policy makers are at a loss for remedies.
“The private sector in Germany has the feeling the government is not doing the right things,” said Nicola Leibinger-Kammüller, chief executive of Trumpf, a German maker of machinery that uses lasers to cut metal. Instead of investing in infrastructure, she said by phone on Thursday, the government has introduced a minimum wage and other policies that raise costs for businesses.
Even as she cautioned against panic, Ms. Leibinger-Kammüller listed reasons to worry about the global economy. They included slowing growth in China, the stagnant Japanese economy, Russia and renewed signs of trouble in Latin America.
“The United States is the only ray of hope,” she said.
So far, the specter of a renewed crisis seems to have polarized European leaders. Jens Weidmann, president of the Bundesbank, the German central bank, is also a member of the European Central Bank’s governing council. He has become increasingly alienated from other members of the council over the question of how best to stimulate the economy.
Speaking to an audience in Bielefeld, Germany, on Tuesday, Mr. Weidmann complained that E.C.B. policies had made things worse by encouraging commercial banks to “fill up on high-interest bonds from crisis countries,” therefore amplifying “the fatal interconnection between banks and governments.”
Mr. Weidmann’s comments came on the same day that the Court of Justice of the European Union heard arguments in a suit brought by a group of disgruntled Germans, including a member of Parliament, who want to prevent the European Central Bank from buying the bonds of eurozone governments.
Yet the recent market turmoil increases pressure on the central bank to do just that — to buy government bonds in large volume, or in central bank parlance to engage in quantitative easing, as a way of pumping money into the economy and preventing deflation. Data published Thursday confirmed an earlier estimate that annual inflation in the eurozone in September was a scant 0.3 percent, far below the E.C.B. target of slightly less than 2 percent.
Inflation that low is a symptom of a weak economy — and threatens to make things even worse. There is a danger that consumers will delay purchases because they expect lower prices in the future. If so, the result could be a deflationary spiral — a sustained outright drop in prices that would undercut corporate revenues and push unemployment, already at 11.5 percent, even higher.
“The very low inflation reading for September will reinforce concern that the eurozone remains on a slippery slope to deflation,” Martin van Vliet, an analyst at ING Bank in Amsterdam, said in a note to clients on Thursday.
“With the cushion against deflation getting smaller and smaller and economic growth in the eurozone stagnating,” Mr. van Vliet said, pressure on the E.C.B. to begin buying government bonds “may become overwhelming over the next few months.”
The more the European Central Bank does to head off deflation and stimulate the economy, the greater the risk of a backlash in Germany. While Germans who want to scrap the euro currency union remain a minority, their numbers appear to be growing. Support for Alternative for Deutschland, an anti-euro party founded in Germany less than two years ago, rose sharply in recent state elections and represents 8 percent of the electorate nationwide, according to recent polls.
Alternative for Deutschland has drained votes from the Christian Democratic party of Chancellor Angela Merkel, and most likely encouraged her to take a hard line toward France after the French government said it would breach eurozone limits on national spending in an effort to stimulate the country’s economy.
The finance and economy ministers of France and Germany have agreed to meet in Berlin on Monday. Their challenge will be to reassure worried citizens that they are still capable of working together to solve Europe’s problems.
Rapprochement is no sure bet. Ms. Merkel said Thursday that there could be no exceptions to European Union rules on national deficit targets, according to Reuters.
But in a hint that there may be some wiggle room in that stance, Ms. Merkel said during a speech to Parliament that she did not rule out measures to increase growth that would not conflict with her aim of achieving a balanced budget.
During next Monday’s meeting, the Germans are expected to push the French to loosen regulations on employment and to take other steps sought by business leaders. Germany, which made sweeping changes to job rules and social benefits a decade ago, has often presented itself as a role model for other eurozone countries.
But signs of a slowdown in the German economy have exposed continuing weaknesses. Entrepreneurs, for example, complain of onerous red tape. Germany ranks a dismal 111th in how easy it is to start a business, according to the World Bank. Even France ranks higher by that measure, in 41st place. New Zealand, Canada and Singapore are in the top three spots in that list, while the United States is 20th.
“France is a good example when it comes to delaying much-needed fiscal reforms,” said Ulf M. Schneider, chief executive of Fresenius Management, a German health care company. But he said that Germany lags in changes to improve its competitiveness.
“The recent growth issues in Germany show that this country is not walking on water,” Mr. Schneider said in an email. “I am not aware of any meaningful pro-business and pro-investment policies that were implemented in recent years.”
Two years ago, European leaders defied predictions of the common currency’s demise by displaying more political will than the euro doubters had thought possible. The politicians now have their chance to confound the skeptics again.
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