Austerity here to stay, warns German leader
GERMAN Chancellor Angela Merkel tried to ease tensions with new French President Francois Hollande yesterday, after she supported rival Nicolas Sarkozy in the campaign.
However, she warned that the new French leader – and his currently unknown peer in Greece – will not be allowed to renegotiate the Eurozone’s fiscal discipline deal.
Merkel said that Hollande would be “welcomed with open arms here in Germany and by me”. But she added at a later press conference: “We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries.”
Prime Minister David Cameron also called Hollande to congratulate him on his victory, though the Tory leader has built his government around a deficit reduction plan while the Socialist Frenchman has called for more spending.
IMF leader Christine Lagarde agreed with Merkel that fiscal discipline and long-term growth are not mutually contradictory, yesterday urging countries to stick to planned cuts.
Jean-Claude Juncker, head of the Eurogroup of finance ministers, also said he had told Hollande that the fiscal pact could not be renegotiated.
French 10-year borrowing costs fell 0.031 percentage points to 2.795 per cent yesterday, while the cost of insuring five-year debt with credit default swaps rose only slightly from 189 to 193 basis points after the election.
CAN HOLLANDE MEET HIS ELECTION PLEDGES?
■ The 75 per cent tax rate. Hollande wants more tax on those earning over €1m (£807,000), declaring very high incomes unacceptable. Critics argue it will drive high earners out of the country, but Hollande seems determined.
■ The fiscal compact. The new President has called for a renegotiation of Europe’s deal to reduce budget deficits, favouring more economic growth. This sets him up for a clash with Germany’s Angela Merkel, who is determined not to renegotiate.
■ The growth compact. One way around this row might be to stimulate the economy without spending more. Hollande has threatened the ECB’s independence, to force the central bank to aid governments. However, Merkel has already started to seek common ground elsewhere – she too wants more growth, but from reforms, not more spending.
■ The deficit. Hollande pledged to eliminate the budget deficit by 2017. However, if he is to cut the retirement age for some workers and employ tens of thousands more teachers, it is far from certain he can hit this target.