Euro zone must tackle yawning economic gaps-Merkel

BERLIN/HELSINKI (Reuters) - German Chancellor Angela Merkel said Sunday that a massive EU rescue plan had only bought the euro zone time to tackle its fundamental problem -- a yawning gap between its strongest and weakest economies.

German Chancellor Angela Merkel delivers a speech at a congress of the German Association of Labour Unions (DGB) in Berlin, May 16, 2010. REUTERS/Thomas Peter

Merkel denounced what she called speculation in the past week against the euro currency. But Europe’s leaders could calm the situation only by sorting out the big economic divergence among the 16 countries which use the common currency.

“We’ve done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries,” she said. “If we simply ignore this problem we won’t be able to calm down this situation.”

Addressing trade union members, Merkel backed the huge rescue package which European Union leaders agreed a week ago to prevent Greece’s debt crisis infecting other weaker euro zone members and even destabilising the global economy.

But Merkel, who until recently had been reluctant to back bailouts for Greece and other nations, said far more was needed.

“In the past week we have experienced ... how there has been speculation against the euro, our currency,” she told the German Federation of Trades Unions, adding the extent of speculation would have been inconceivable only a short while ago.

“This calls for more regulation,” she said in a speech. “But unfortunately this speculation was, and is only possible because there are considerable differences in economic strength and respective indebtedness between the member states of the euro.”

The euro tumbled more than four percent against the dollar last week to an 18-month low of around $1.2350.

Merkel leads Europe’s biggest, and probably strongest economy. Germany’s budget deficit last year amounted to 3.3 percent of its gross domestic product compared with 13.6 percent in Greece, which can no longer borrow on international markets.

Public debt was high in Germany at 73 percent of GDP, but dwarfed by that of Athens, which is heading towards 150 percent.

Austrian Finance Minister Josef Proell said the EU should limit member countries’ debt. This “would lead to a clear cap on new debt, strict budgetary discipline and balanced budgets in Europe,” he told Germany’s Die Welt newspaper.

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Europe’s economic chief joined calls for the spotlight to swing onto the debt piles which euro zone governments have accumulated, to prevent the bad from pulling down the good.

“Because euro zone countries’ economies are tightly connected by a currency, it is important to prevent a weak economic policy in one country from threatening the success of others,” said European Union Economic and Monetary Affairs Commissioner Olli Rehn.

“Economic policy monitoring has earlier paid attention almost entirely to deficits, and debts have grown excessively large,” he wrote in Finnish newspaper Helsingin Sanomat.

“In the future the development of state debt must be followed more closely than before and possible downward spirals must be cut off in time.”

Rehn said EU action had prevented Greece’s problems from spreading, but the crisis also revealed a flaw at the heart of the euro zone’s economy. “We stopped the spread of a bushfire in Greece from becoming an uncontrollable forest fire,” he said.

“The economic and monetary union’s problem has been that the monetary pillar has been from the start stronger than the economic one. The crisis has shown that both are needed.”

The euro zone has a single monetary policy, with interest rates for the entire bloc decided by the European Central Bank.

Budget policy remains the preserve of the 16 governments and parliaments, although Rehn has proposed forcing countries to submit their budget plans to Brussels before they go for parliamentary debate and approval.

An opinion poll out Sunday showed the political price that some European leaders must pay for imposing austerity to get their budget deficits under control.

Spain’s conservative opposition has more than doubled its lead over the government since new spending cuts were imposed.

A Demoscopia poll in the newspaper El Pais showed the Popular Party has a 9.1 percentage point advantage over Prime Minister Jose Luis Rodriguez Zapatero’s Socialists, up from 4.2 percentage points a fortnight ago. The poll was taken on May 13, one day after cuts in civil servants’ pay and a pension freeze were announced.

However, another poll showed that an austerity package Greece imposed in return for a 110 billion euro EU and IMF bailout has had little effect on support for the government.

Additional reporting by Holger Hansen in Berlin, Maria Sheehan in Frankfurt, Angeliki Koutantou in Athens and Elisabeth O’Leary in Madrid; editing by Jon Boyle