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Merkel Looks East for Austerity Allies in Hollande Talks

March 06, 2013

Merkel Looks East for Austerity Allies in Talks With Hollande

Merkel and French President Francois Hollande, the key players in the euro-area debt crisis, travel to Warsaw today for talks on closer European Union integration with Polish Prime Minister Donald Tusk and his peers from the Czech Republic, Slovakia and Hungary. The six leaders are due to hold a joint news conference at about 4 p.m. Warsaw time. Photographer: David Gannon/AFP via Getty Images

German Chancellor Angela Merkel reached out to the ex-communist east as she pushes plans for a more competitive Europe, saying the euro area won’t become a “closed club.”

Merkel’s comment, which signaled her aim to ally with EU nations she views as sharing German values of fiscal discipline, followed a meeting in Warsaw today with French President Francois Hollande, Polish Prime Minister Donald Tusk and their peers from the Czech Republic, Slovakia and Hungary.

As southern Europeans vilify Merkel for her austerity-led solution to the debt crisis, the head of Europe’s biggest economy is looking for support to the eastern countries she knows from childhood growing up in East Germany. It was the first time that French and German leaders jointly attended the four-country forum.

Euro countries “are open for all European Union member states to work with us on this project of a strong economy, lots of jobs, solid budgets and finances,” Merkel told reporters in Warsaw after the talks. The 17 nations currently using the euro “naturally don’t want to form a closed club,” she said.

Forging eastern alliances might also help Merkel outmaneuver the U.K. as it seeks to shield the City of London, and allow her to sidestep efforts to block closer integration in Europe, including her latest push on competitiveness.

‘Like-Minded’

“Germany’s allies in the sovereign-debt crisis are not too numerous,” Kai-Olaf Lang, an analyst at the Berlin-based German Institute for International and Security Affairs, said by telephone. In contrast, Central Europe is “mainly like-minded in economic and financial matters” with the German government.

Merkel is urging much of Europe to follow Germany’s example in the 2000s and cut labor costs in a bid to lure investment to their economies after the region’s worst financial crisis since World War II. Germany boosted its global competitiveness by 22.5 percent since 1999, while France increased by 1.2 percent, Italy by 1.4 percent and Spain by 3.3 percent, an index based on unit labor costs compiled by the European Central Bank in 2012 shows.

Merkel and Hollande, who lead the euro area’s two largest economies, have said they will offer a joint blueprint for boosting competitiveness in May before an EU summit in June that is due to back a Europe-wide pact.

For all the common purpose, their statements today underscored a divergence of emphasis since Hollande came to power in May on a platform of easing Merkel’s austerity-led prescription to the euro-area debt crisis.

Need for Growth

“Do we only have to reduce our public deficits? No,” Hollande said at a joint news conference with the five other leaders. “We have to boost growth,” which is both a national and a European task, he said.

German-French differences have led Merkel to seek additional allies and embrace Tusk as a partner. She praised his support for the EU’s deficit-curbing fiscal compact in late 2011 and encouraged Poland, the most populous of the formerly communist nations that joined the EU in 2004, to adopt the euro.

“We are looking for a golden key in Europe, a philosopher’s stone if you will, to ensure both fiscal discipline and growth,” Tusk said after the meeting. Europe must boost its competitiveness and the euro area “should be open.”

Merkel cites countries such as Poland and Bulgaria as models for a fiscal “culture of stability” and the economic transformation of highly-indebted euro nations.

Polish ‘Example’

Her poster child is Poland, the EU’s biggest eastern economy and the only one in the 27-member bloc to avoid a recession since the global financial crisis began in 2008.

“Poland can serve as an example” for the way it overhauled its post-communist economy in the 1990s, Merkel said in a speech honoring Tusk in Berlin last May.

The Polish economy is forecast to grow 1.2 percent this year and 2.2 percent in 2014, more than Germany’s 0.5 percent and 2 percent respectively, according to the European Commission’s Feb. 22 outlook. Germany is Poland’s biggest trading partner, taking more than 25 percent of Polish exports.

While Tusk’s government has said it won’t set a date for joining the euro, Finance Minister Jacek Rostowski said March 1 that Poland risks “dramatic marginalization” outside the currency union. Merkel signaled German interest in expanding the euro area eastward before Estonia joined in 2011, calling the Baltic nation’s austerity drive to qualify for the currency “admirable.”

Also attending the meeting were prime ministers Robert Fico of Slovakia, Petr Necas of the Czech Republic and Hungary’s Viktor Orban. The forum is known as the Visegrad Group after the Hungarian town near the Slovak border that hosted the first meeting in 1991.

In Eastern Europe, Germany’s strategic aim is to avoid splitting the EU into euro-area and non-euro countries, Lang said. “Germany is still the guardian of unity in the European Union,” he said. “For France, this has not been a priority.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Patrick Donahue in Warsaw at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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