x Abu Dhabi, UAESunday 23 July 2017

Merkel: euro austerity pact 'here to stay'

German chancellor tells Francois Hollande, the new France president, that budget discipline is not negotiable, as markets tumble after elections in France and Greece.

BERLIN // The euro pact on budget discipline is not negotiable, a defiant German chancellor Angela Merkel told France's new socialist president Francois Hollande yesterday.

Diluting the Europe-wide austerity package was a key plank of Mr Hollande's election campaign, but Mrs Merkel said: "It has been negotiated and has been signed by 25 countries."

Elections in France and Greece have re-ignited the euro debt crisis after months of relative calm. Markets tumbled yesterday amid fear in financial markets that the German-led austerity plan is about to unravel.

Further chaos loomed last night when Antonis Samaras, the leader of the Greek conservative party that won most votes in Sunday's parliamentary elections, failed to form a coalition government. Failure by the second and third-placed parties could trigger new elections next month, fuelling uncertainty over the ailing European economy.

In France, Mr Hollande has said he wants to place more emphasis on boosting economic growth and less on the painful austerity that Germany, as European paymaster, has imposed in return for aid to struggling euro members.

"We are in the middle of a debate to which France, of course, under its new president, will bring its own emphasis. But we are talking about two sides of the same coin - progress is only achievable via solid finances plus growth," Mrs Merkel said.

Mr Hollande's election win poses a challenge to Mrs Merkel's dominance in Europe, and coincided with the Greek parliamentary election on Sunday in which voters punished the big parties that had backed austerity measures demanded by international lenders, led by Germany.

The euro debt crisis originated in Greece in 2010, and Sunday's election results may mean that Greece will refuse or be unable to implement the budget cuts the EU is demanding in exchange for substantial aid.

Critics in Germany say Mrs Merkel's unusually open support for the incumbent Nicolas Sarkozy in the election campaign was a tactical error that inadvertently helped Mr Hollande to win votes and threatens to damage French-German relations, seen as vital for progress in the 27-nation European Union.

She dutifully telephoned Mr Hollande on Sunday night to congratulate him but the three-sentence statement issued by her office afterwards included an invitation that read more like a summons: "The chancellor has invited the elected French president Hollande to come to Berlin as soon as possible after his inauguration."

In the past two years, Mrs Merkel and Mr Sarkozy had formed a close alliance to save the euro. They were dubbed "Merkozy" in the media. But given Germany's bigger economic clout, there was never any doubt about who was the senior partner.

Mrs Merkel made clear yesterday that she would not back any "giant economic stimulus programmes" and said the EU was already drafting plans to boost growth in Europe.

But she said she was determined to work with Mr Hollande. "German-French cooperation is essential for Europe," she said. "As we all want Europe to succeed, this cooperation will start quickly." Mrs Merkel, who refused to meet Mr Hollande during the campaign, said she would "welcome him with open arms".

The new president is expected to travel to Berlin on May 15, immediately after his inauguration. It will be his first foreign visit.

Mrs Merkel's allies in Berlin sounded even less compromising yesterday. "Germans could end up paying for the socialist victory in France with more guarantees, more money," said Volker Kauder, parliamentary leader of Mrs Merkel's conservatives. "And that is not acceptable. Germany is not here to finance French election promises."

In his campaign, Mr Hollande pledged to create tens of thousands of new teaching jobs, introduce a 75 per cent tax on the wealthy and raise the minimum wage.

He also favours the introduction of joint euro zone bonds - rejected by Mrs Merkel because it could push up Germany's own borrowing costs. It could also require a more active role for the European Central Bank in fostering growth, equally unacceptable to Germany, which has always insisted that the ECB must focus strictly on fighting inflation.

On a personal level, the reserved Mrs Merkel may get on better with the down-to-earth Mr Hollande than she did with Mr Sarkozy, who was seen by German officials as overbearing and hyperactive.

But they are on opposite sides of the political fence and it will take them time to establish a working relationship. Commentators in Germany said they must do so very quickly to keep the euro rescue on track.

In the end, Mr Hollande could become a better partner to Mrs Merkel than his predecessor was, wrote Süddeutsche Zeitung, a leading German newspaper. "Unlike 'Merkozy', 'Merklande' will cover the conservative-liberal as well as the Social Democratic Europe," the paper said in a commentary. "They could ensure that German-French ideas are accepted by the other nations."

Mrs Merkel has no option but to strike a deal with Mr Hollande, the editorial said. "Reaching an understanding with Hollande will spare the chancellor from becoming the EU's isolated hegemon."