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DEBT CRISIS

France, Germany demand pact as S&P talks tough

France and Germany called on Monday for Europe's leaders to agree strict rules for fiscal discipline at their summit this week, as Standard and Poor's threatened the region with sweeping ratings downgrades.

The bold call by President Nicolas Sarkozy and Chancellor Angela Merkel for a rewrite of the EU treaty to set uniform tough budget standards across the eurozone raised hopes that the region might finally take decisive, comprehensive moves to end the debt crisis.

But S&P’s warning hours later that it might cut the ratings of the region’s two giants and 13 other members if they continue to dither raised the stakes for the Brussels summit on Thursday and Friday.

The summit is “an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date… and advance a credible response to the crisis that would go far towards restoring investor confidence,” S&P said.

“If the response of policymakers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards” that could force the downgrade, it said.

The Asian Development Bank, meanwhile, trimmed its 2012 growth projections for East Asian economies, including China, from 7.5 percent to 7.2 because of the continuing eurozone uncertainties.

It said “major downside risks” included a deep recession in Europe and the United States, higher protectionism and persistent inflation.

Sarkozy and Merkel appeared united and determined on Monday when they offered a new direction for the single currency zone as it teeters on the brink of collapse.

The two backed automatic sanctions against EU member states whose deficits go over three percent of gross domestic product.

They also called for a “reinforced and harmonised golden rule” on deficits, which could oblige some states to enshrine the commitment to balance their public finances in their constitution or legislation.

The new rules would be enshrined in a rewritten EU Treaty signed by all 27 EU members or, as an alternative, by just the 17 eurozone members with the other nations signing on a voluntary basis.

Sarkozy warned of a “forced march to reestablish confidence in the euro and the eurozone.”

“The goal that we have with the chancellor is for an agreement to have been negotiated and concluded between the 17 members of the eurozone in March, because we must move quickly,” he said.

The Franco-German proposal is to be detailed in a letter to EU president Herman Van Rompuy on Wednesday.

Hours later S&P upped the stakes though when it said that, without strong action in Brussels, triple-A rated Germany, Austria, Finland, Netherlands, and Luxembourg, and AA-rated Belgium, could all be cut by one notch.

France, also AAA, and eight others with lower ratings faced up to two-level cuts.

S&P said it would complete its ratings review “as soon as possible” following the summit.

It said credit conditions were tightening and sovereign borrowing costs rising across the euro area, and that it was facing a plunge back into region-wide recession next year.

Added to this mix were “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members.”

Reacting to the S&P warning, France and Germany “in full solidarity” confirmed “their determination to take all the necessary measures, in liaison with their partners and the European institutions to ensure the stability of the euro area.”

Meanwhile in Italy, its finances most at risk of failing in current market conditions, new Prime Minister Mario Monti presented a tough austerity package to parliament, warning of a Greek-style “collapse” if it is not adopted.

In Ireland Prime Minister Enda Kenny announced a €3.8 billion austerity budget, a day after warning citizens to brace for years of economic hardship during a historic television address.

Greece, however, got good news when the International Monetary Fund released a much-needed €2.2 billion in bailout money after months of delay.

That is likely to be matched by €5.8 billion pending from the European Union, seen as enough for the short term to help Athens avoid defaulting on its debt while it negotiates with commercial lenders.

Italian bond rates fell below the 6.0 percent threshold for the first time since the end of October, and rates also dropped on Spanish and French bonds, although they rose for Ireland.

ECONOMY

German cabinet agrees record levels of new debt for 2021

The German government agreed Wednesday to take on record borrowing this year to weather the economic blow of the coronavirus pandemic.

German cabinet agrees record levels of new debt for 2021
Finance Minister Olaf Scholz. credit: dpa | Kay Nietfeld

In budget adjustments signed off by Chancellor Angela Merkel’s cabinet, Europe’s largest economy will borrow a total €240.2 billion in 2021, a third more than initially planned.

The adjusted budget, which will see Berlin break its taboo on new debt for the third year in a row, still has to be approved by parliament.

“We have decided to suspend the debt brake once again, and I think that’s justified,” Merkel told the Bundestag lower house, adding that the budget was “measured” despite “more insecurity” than usual.

“We are taking the right measures to manage the economic and financial effects of the pandemic,” added Finance Minister Olaf Scholz.

After maintaining a budget surplus for the last decade, the economic slump caused by the pandemic has forced Berlin to take on €370 billion in new debt in 2020 and 2021, with an extra €85.1 billion planned for 2022.

With the country facing a dangerous third wave and shutdown measures extended into April, Germany’s recovery has proved slower than expected this year.

Having originally planned to halt borrowing in 2022, the government is now aiming to return to its golden rule of fiscal discipline a year later, with only €8.3 billion of new debt in 2023.

The so-called “debt brake” is a rule enshrined in the constitution which forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

READ ALSO: Merkel admits Easter coronavirus shutdown plan her ‘mistake alone’

Germany smashed the taboo in 2020 and 2021 as it scrambled to shield businesses and workers from the economic hit of the coronavirus.

The state has already paid out more than 114 billion euros of financial support to businesses since the beginning of the pandemic in the form of guaranteed loans, direct aid and shorter-hours work schemes.

Yet according to a report published by the German Economic Institute on Wednesday, the crisis has still cost the German economy 250 billion euros so far.

Extended restrictions

Hopes of a recovery this year have been dashed with entire sectors of the economy idled for months and the government revising down its 2021 growth forecast to three percent in January.

As a third wave of the pandemic tears through Europe, Germany extended shutdown measures by another several weeks at a marathon meeting between Merkel and state premiers on Monday.

Though plans for a strict five-day lockdown over Easter were scrapped Wednesday, businesses such as non-essential shops, leisure facilities and cultural venues will still remain largely closed until at least April 18.

In a report published Monday, the Bundesbank central bank predicted that restrictions would see economic output “contract markedly” in the first quarter of 2021.

The measures have also been met with growing frustration from business organisations, with the German Commerce Association warning that 120,000 shops could be forced to close if the measures continue to drag on.

The issue of taking on new debt, meanwhile, has also sparked heated political debate ahead of a September general election.

In January, Merkel’s chief of staff Helge Braun caused a major ruckus within his own CDU party when he suggested that the rule on fiscal discipline should be lifted for several years to come.

SEE ALSO: ‘We have finances well under control’: Germany takes on less debt than expected in 2020

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