German finance minister warns of debt addictions

24th June 2010, Comments 0 comments

German Finance Minister Wolfgang Schaeuble warned eurozone peers and the United States on Thursday not to get hooked on borrowing, as a war of words brewed ahead of a G20 summit in Toronto.

"Governments should not become addicted to borrowing as a quick fix to stimulate demand," Schaeuble wrote in an op-ed piece printed in the Financial Times and Handelsblatt newspapers.

"Deficit spending cannot become a permanent state of affairs," he stressed.

Germany has been singled out by officials in Europe and the US for failing to boost domestic demand, and billionaire investor George Soros warned on Wednesday that the euro could fail because of decisions by German authorities.

They have focused on reducing the deficit and debt of Europe's biggest economy, whereas the United States is enjoying robust growth though it has yet to deal with its own precarious finances.

Germany is slowly recoving from its worst recession since World War II amid a eurozone debt crisis.

Schaeuble said there was just one reason for recent turmoil in the 16-nation bloc: "Excessive budget deficits in many European countries."

Acknowledging that Germany found itself the focus of "one of the most passionately debated economic issues of the day" the finance minister replied with "an emphatic no" to the question of whether Berlin was acting prematurely in reining in its deficit.

The issue is likely to be high on the agenda at a meeting of the Group of Eight and Group of 20 developed and developing economies in Toronto on Friday and Saturday.

Schaeuble underscored that Germany still had an expansionary budget this year "unlike most of its European peers," and said Berlin was hardly "slamming on the brakes" with a "controlled and measured approach to reducing our deficit."

He described Germany's path as "expansionary fiscal consolidation."

Some economists have pointed out that such consolidation can actually boost growth, especially in countries with excessive state spending and deficits.

Germany managed to essentially balance its budget in 2007 and 2008 before increased spending to battle the recession saw its public deficit exceed the three percent EU limit last year.

The German government has said it will try to cut at least 80 billion euros (99 billion dollars) from the budget by 2014, including more than 11 billion euros next year.

It has also passed "debt brake" law that binds Berlin to a balanced budget again by 2016 at the latest.

"The German government knows it has a responsibility to promote growth in Europe and the world. We will rise to it not by piling up public debt but by fulfilling our traditional role as an anchor of stability," Schaeuble wrote.

© 2010 AFP

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