Angela Merkel scolds Italy and France over the faltering eurozone recovery

German chancellor claims stifled growth is due to countries running high deficits and breaking fiscal rules set by Brussels
angela merkel
German chancellor Angela Merkel claims countries have ignored Brussels and the ECB to continue running larger deficits than allowed under fiscal rules. Photograph: Odd Andersen/AFP/Getty Images

Angela Merkel has delivered a sharp rebuke to Italy and France for hindering the eurozone's recovery by breaking longstanding fiscal rules.

The German chancellor, under pressure following a fall in GDP in the second quarter, said faltering growth was the direct result of the 18-member currency zone's inability to punish those countries that ran high deficits in contravention of limits set by Brussels.

She said Germany had shown it was possible to cut the government's annual spending deficit while at the same time improve the economic situation.

Speaking to an audience of Nobel prize-winning economists in the Bavarian town of Lindau, she said individual countries had ignored Brussels and the European Central Bank (ECB) to continue running larger deficits than allowed by the fiscal rules. "We have very little, if any, possibility of sanctioning those countries that break the rules," she said.



However, critics of Merkel and her finance minister Wolfgang Schaeuble, argue that Germany is the source of the currency zone's problems following its pursuit of balanced budgets while harder-hit countries have yet to rebuild their banking sectors and bolster consumer confidence.

Germany's persistent trade surplus with other EU countries is also blamed for undermining the recovery among the other 17 members, which import German goods but struggle to sell inside the EU's largest economy.

Nobel economics laureate Joseph Stiglitz criticised the chancellor on the sidelines of the conference for imposing policies that have led to high unemployment and slow growth. Merkel has resisted Stiglitz's calls for a Keynesian spur to recovery, including pooling debts in commonly-issued "Eurobonds" to allow members of the currency to borrow money at lower interest rates.

"We see the enormous price that Europe is paying," the former World Bank chief economist told Bloomberg Television. "Hopefully the reality of this failed policy will strike."

Merkel told Stiglitz and other Nobel laureates that monetary union needed to be married to fiscal union, which would provide the confidence and discipline for stained growth. She said that Europe, with 7% of the world's population, 25% of world GDP and 50% of social security expenditure faced many difficult decisions over spending in the next 30 years. There was also the threat of another financial crisis unless global regulators clamped down on new forms of trading that posed a risk to the banking system. She said progress had been made in reining in banks, but they still constituted "an area which is extremely bereft of regulation".

Shadow banking, which involves trading and lending away from regulated exchanges, is worth billions of dollars and has increasingly posed concerns for central banks and financial watchdogs. "If we don't put them under the microscope, with the same consequences, the danger of another financial crisis is already pre-scripted," Merkel added.