Atlantic Council

Ahead of a two-day meeting of EU finance ministers in Brussels that starts Tuesday, Germany remains reluctant to cut taxes or significantly boost spending.  Merkel's hesitance to further contribute to EU rescue packages is increasingly putting her at odds with the UK, who recently reduced VAT, and France, who is expected to unveil new economic stimulus measures in the next few weeks.  The FT:

Differences were widening on Monday over a European Commission €200 ($252.7) billion economic recovery plan, with France and the UK eager to see a big, coordinated stimulus package but Germany more critical of such reflationary measures.  A paper by the French presidency of the European Union, to be discussed at Tuesday’s EU finance ministers’ meeting in Brussels, was similar in content and tone to the Commission’s plan, with some passages apparently lifted directly from the proposal published last week, EU officials said.

In contrast, Germany remained skeptical, with Chancellor Angela Merkel yesterday ruling out significant tax cuts and Peer Steinbrück, finance minister, at the weekend likening countries that are ready to adopt large-scale deficit spending programs to "lemmings" hurrying down the path to mass suicide.  The Brussels meeting will debate how EU countries haul their economies out of recession, ahead of a summit next week of EU heads of state and government that is set to approve the Commission proposals, if in modified form.

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A more robust approach is backed by France, with President Nicolas Sarkozy remarking pointedly last week after talks with Ms. Merkel that France was "working" on a stimulus plan while Germany was still "thinking" about what to do.  France, the UK, and others contend that an extra German stimulus would help not merely the German economy but the EU as a whole.

The WSJ similarly reports:

While policy makers in the U.S. and elsewhere in Europe are drawing up ever-larger fiscal stimulus proposals, Ms. Merkel told her center-right Christian Democratic Union's annual conference that she would continue to strive for a balanced budget.

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Germany's government has been vocally skeptical about whether debt-fueled spending plans will work. But many of Ms. Merkel's conservative colleagues, as well as German business groups, economists and international organizations, are complaining that Germany is doing too little to lift its economy, which is contracting fast amid a slump in global exports.

Neighboring European countries such as France also are disappointed that Germany isn't taking the lead to revive growth through tax-and-spending measures.  Instead, Ms. Merkel lectured her party on financial discipline on Monday, praising the famously thrifty inhabitants of Swabia, the region around Stuttgart where the Christian Democrats' conference is being held.

The root of the global financial and economic crisis is known to every Swabian housewife, Ms. Merkel said: "You can't keep on living beyond your means."  A lack of thrift in advanced economies caused the crisis and can't be its cure, she said.

Merkel said the country might enact further fiscal measures in early 2009 if the economy remains unstable.  However, many economists are already criticizing the government for not taking seriously enough the major downturn Germany faces.

Related Posts:

• EU Economy Update
• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe