German economic growth raises case for eurozone aid

Monday, 16 May 2011 00:01 -     - {{hitsCtrl.values.hits}}

FRANKFURT, (AFP) - Sustained strength in the German economy will put pressure on Berlin to provide more financial aid to indebted eurozone partners, analysts say.

The biggest European economy grew by 1.5 percent in the first three months of the year from the previous quarter, an official estimate showed last week, a pace that surprised financial markets.

The other eurozone heavyweight, France, reported a solid advance of 1.0 percent, while the economy in Spain, considered a crucial buffer to the bloc's debt crisis, advanced by a more modest 0.3 percent.

Germany was boosted by stronger domestic demand and a catch-up effect after the weak end to 2010, and retained its role as Europe's economic locomotive.

New Economy Minister Philipp Roesler welcomed the news, but it also means Berlin would find it harder to refuse aid to partners like Greece and Portugal as they struggle with persistent debt crises.

“This will add to the pressure on Germany to agree to new support loans for Greece, which will probably be unable to return to the capital market in early 2012 as planned,” Commerzbank chief economist Joerg Kraemer said.

Greece already benefits from a financial aid package worth 110 billion euros ($155 billion) from the European Union (EU) and International Monetary Fund, but markets estimate it will need up to 60 billion euros in additional aid.

With Germany seemingly set for economic growth of around 3.0 percent this year, which would generate higher tax receipts and curb unemployment, opposing aid for its partners could be hard to justify.

Another economist underscored that the EU rescue packages had helped prevent Germany from suffering a “double-dip” recession following its worst post-war slump in 2008-2009.

“Safety nets offered to Greece and other small peripheral countries have shielded the core European upswing from the vicious financial crisis at the fringes of Europe,” Berenberg Bank's senior economist Holger Schmieding noted.

“Germany must continue to do its bit to contain the eurozone debt crisis,” he added, if only to protect its own financial sector which holds a lot of the debt issued by Greece and other peripheral countries.

Falling German unemployment should help German officials make the case to a public that is generally opposed to additional financial aid for southern countries where retirement ages can be much lower, for example.

“The message is taken in more easily when one is working and has rising revenues,” Barclays Capital economist Frank Engels told AFP.

So far however, German politicians have been loath to make the case for more aid to a public and parliament that is in some cases quite hostile to the idea.

German Finance Minister Wolfgang Schaeuble, from the conservative CDU party, began the task last week by telling lawmakers that Greece would have to accept clear conditions in exchange for fresh aid.

“Among German politicians, no one really wants to hear about more help” after already approving aid for Greece, Ireland and Portugal, Engels noted.

“'Rescue' is a nice word but Germans cannot hear it any more,” the centre-left weekly Die Zeit added in an editorial.

Among members of the economically liberal FDP party, the CDU's junior coalition partners, more than a dozen MPs have refused to consider more aid and also oppose a mooted permanent rescue mechanism for the eurozone.

German parliamentary approval for the European Stability Mechanism, which would take effect in mid 2013, is scheduled for a vote later this year, and if that opposition spreads among CDU lawmakers, Chancellor Angela Merkel could turn the issue into a vote of confidence, Engels speculated.