Merkel pushes euro pact amid credit threat

German Chancellor Angela Merkel said on Tuesday she would press on with "important" reforms for the eurozone, following a downgrade threat by credit rating agency Standard and Poor's for Germany and 14 other eurozone countries.

Merkel pushes euro pact amid credit threat
Photo: DPA

“On Thursday and Friday we will take the decisions which we consider important for the eurozone…,” she said in response to a question about the credit warning, referring to a crucial EU summit in Brussels.

This would contribute to stabilising the 17-member eurozone and provide confidence, Merkel said at joint press conference in Berlin with Afghan President Hamid Karzai.

“I have always said it’s a long process which will still last a long time. But this path is now mapped out, also yesterday through the meeting with the French president, and we will continue on this path,” she added.

The warning that Germany and France and 13 other members of the 17-nation eurozone are now on negative credit watch came from Standard & Poor’s credit

rating agency late Monday.

It followed a joint announcement by Merkel and French President Nicolas Sarkozy in Paris that they wanted treaty changes to enforce budget discipline, in a bid to tackle the euro crisis.

But just hours later, Standard and Poor’s warned the eurozone members of possible credit downgrades as economic conditions worsen and the region’s leadership remains divided over what to do.

Raising the stakes three days before Europe’s leaders were to meet to forge a comprehensive fix to the economic crisis, S&P placed the 15 countries on a negative credit watch — a warning of a possible imminent cut in their sovereign credit ratings.

“Systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole,” the ratings agency said in a statement.

It cited tightening credit across the single-currency zone, the rising costs for even the fiscally strongest governments to borrow, and deteriorating economic conditions that could push the whole region into recession next year.

But S&P also blamed “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members.”

The warning threatened a one-notch cut to the hallowed AAA ratings of Germany, the Netherlands, Finland, Luxembourg and Austria.

France, also AAA-rated and the eurozone’s second-largest economy, could be hit with a two-notch cut, as could the other countries currently rated below AAA. Cyprus and Greece, their ratings already cut to just above or at junk bond level, were not affected by the warning.

S&P said it would complete a review of the 15 countries’ ratings “as soon as possible” following the EU summit in Brussels Thursday and Friday.

German Finance Minister Wolfgang Schäuble said on Tuesday S&P’s warning was the “best incentive possible” for this week’s EU summit.

“Markets have no trust in the eurozone right now,” Schäuble said in Vienna, adding that S&P’s move was the “best incentive possible for this week’s summit … I can think of nothing more effective.”

S&P called the summit “an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence.”

“If the response of policymakers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards,” that could force a downgrade of the 15.

“The failure to present a strategy that would in scope and content address investors’ concerns could weigh more heavily on financing conditions than what we observed in the aftermath of previous summits,” it said.

That would significantly raise the risk of recession, the ratings firm added.

French Foreign Minister Alain Juppe said on Tuesday that the Franco-German plan to overhaul the EU treaty was enough response to ratings agency Standard and Poor’s warning that eurozone nations faced possible credit downgrades.

Juppe told RTL radio that a plan to toughen EU budgetary rules “is precisely the response to one of the major questions of this ratings agency (S&P) that mentions the insufficiency of European economic governance.”

AFP/The Local/mry

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.