Merkel Rejects Obama\'s Call to Spend

BERLIN—Chancellor Angela Merkel roundly rebuffed U.S. President Barack Obama\'s call for Germans to aid the global recovery by spending more and relying less on exports, even as she warned that Europe\'s own financial crisis is far from over.



\'Germany knows the value of all things European\'

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Maurice Weiss for The Wall Street Journal

.Read a transcript of the interview with German Chancellor Angela Merkel

.In an interview with The Wall Street Journal in her Berlin chancellery, an unapologetic Ms. Merkel said the nations that share the beleaguered euro have merely bought some time to fix the flaws in their monetary union. She called on the Group of 20 industrial and developing nations meeting in Toronto this weekend to send a signal that tougher financial-market regulation is on its way to dispel the impression that momentum is fading amid resistance by big banks.



She took aim at an idea voiced by France, the U.S. and others that Germany should help global producers by spurring its persistently weak consumer demand and ending its dependence on unsustainable spending elsewhere. The latest call came in a letter last Friday from Mr. Obama to the G-20, in which he asked big exporters—Germany, China and Japan—to rebalance global demand by boosting consumer spending.



Ms. Merkel countered that Germany\'s growth and employment are rising—and therefore the world\'s fourth-largest economy has no reason to rethink its dependence on its powerhouse industrial sector and large trade surplus. \"German export successes reflect the high competitiveness and innovation strength of our companies,\" she said. \"Artificially reducing Germany\'s competitiveness would be of no use to anyone.\"



The U.S. reiterated its stance Wednesday. \"It is important for European growth in particular, and the world more generally, that advanced surplus economies in Europe strengthen the contribution of internal demand to growth,\" a senior administration official said.



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IMF Backs Spain\'s Austerity Measures. .Ms. Merkel\'s defense of Germany\'s export-heavy model marks Berlin\'s second rebuff to international demands in recent days. Early this week, Ms. Merkel rejected calls for Germany to prolong fiscal-stimulus measures in the short term.



Germany\'s position threatens to isolate it within the G-20, likely making it difficult for it to win support for tougher financial-market regulation and its other priorities.



The country is at the center of attention now that China, whose growth also depends largely on trade surpluses, has defused some of the U.S.-led pressure to rebalance its economy by announcing a more flexible exchange-rate policy.



A report published Wednesday as a \"primer\" for G-20 governments by the Center for Economic Policy Research, a European network of leading economists, accused Germany of doing less than China to redress global imbalances, which the report called a threat to global economic stability.



Ms. Merkel denied Germany is under pressure to change, predicting \"a very relaxed discussion about this topic in Toronto.\" She suggested that the prevailing economic theory on stimulus—that increased deficit spending promotes growth— doesn\'t apply in Germany.



Continuing to run big deficits could backfire here, she said, because of Germans\' angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, \"then the citizen is more willing to spend money,\" she said, \"because he knows that he can count on the pension, health and elderly-care systems.\"



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Maurice Weiss/OSTKREUZ for The Wall Street Journal



Ms. Merkel in Berlin Tuesday: \'Artificially reducing Germany\'s competitiveness would be of no use to anyone.\'

.However, acknowledging some of the criticism, the chancellor said Germany still needs more \"structural reforms,\" especially to \"improve the incentives to take up work and to strengthen the services sector.\" Many economists say German service industries are overregulated and underdeveloped compared with those in the U.S. and other advanced economies.



Berlin\'s emphasis on fiscal discipline received support from top European Union officials Wednesday in a letter to the G-20 that said the \"global recovery is progressing better than anticipated,\" so that the time for stimulus is ending. Leading economies should agree to consolidate budgets \"starting at the latest in 2011,\" EU President Herman Van Rompuy and European Commission President José Manuel Barroso wrote in the letter.



Germany\'s anemic consumer spending, which could be further weakened as budget cuts kick in starting in 2011, is causing frustration in crisis-hit EU countries such as Spain and Greece, which need a boost from Germany as they take drastic measures to repair their public finances.



Many economists believe Berlin could stoke private demand by putting more money in Germans\' pockets through measures such as tax cuts and by delaying planned austerity measures.



In the interview, Ms. Merkel said Germany has made \"an important contribution to overcoming the global economic crisis in the last two years.\" She pointed to Germany\'s continuing fiscal-stimulus measures, which come to over 2% of gross domestic product in 2010, according to the International Monetary Fund.



\"That\'s more than in many other countries,\" where stimulus policies are ending earlier, she said. But with Germany\'s economy expected to grow by close to 2% this year, she said the time has come to remove the stimulus \"step by step\" from 2011.



Ms. Merkel, a 55-year-old former physicist who grew up in Communist East Germany, has been chancellor since 2005 and won a decisive re-election victory last year as head of a conservative-led coalition. Since then, however, her own and her government\'s popularity have fallen amid internal squabbling between her cabinet allies.



Many German voters are also angry that Ms. Merkel agreed to the €110 billion ($135 billion) EU-IMF bailout of highly indebted Greece, and to the creation of a €750 billion rescue facility for other euro-zone countries that might hit financial trouble. Opinion polls suggest the euro-zone crisis has hardened Germans\' negative view of the euro.



Ms. Merkel said her compatriots aren\'t turning euro-skeptic. \"Germans know the value of all things European,\" she said. \"All of the current discussion about the euro is taking place on the basis that we want to make the euro stronger, not to call it fundamentally into question.\"



Germans also complain frequently about the costs of German unification, but that doesn\'t mean that want to reverse it, Ms. Merkel pointed out.



However, Ms. Merkel warned that the euro zone hasn\'t ended the financial crisis that gripped Greece this spring and threatened to spread to other countries such as Spain and Portugal.



\"We have calmed down the situation through the rescue facility,\" she said, adding: \"We now have the possibility, and have won time, to remove structural weaknesses in the euro zone and its framework of rules.\"



She rejected the criticism, voiced in Paris, Brussels and other EU capitals, that Germany delayed the rescue of Greece for too long, allowing the crisis to escalate.



\"It was right that we didn\'t go down the supposedly easy route of supporting Greece financially without clear conditions, without reflecting on what the underlying causes of this crisis are,\" she said. \"Instead we are now tackling the causes, namely the lack of competitiveness\" in Greece and other economies, she said.


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