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ANGELA MERKEL

Merkel, Sarkozy vow to solve eurozone crisis

The leaders of Germany and France put aside their differences on a controversial tax of financial market transactions and promised to speed up various measures to ease the eurozone crisis, as the euro flirted with new market lows Monday.

Merkel, Sarkozy vow to solve eurozone crisis
Photo: DPA

German Chancellor Angela Merkel said she could imagine a levy, but one imposed only within the eurozone and praised French President Nicolas Sarkozy’s “good example” on the issue, after the Frenchman had said he was prepared to go it alone if no Europe-wide accord could be struck.

The French announcement that it could implement the so-called “Tobin Tax” unilaterally was met with dismay by many European leaders last week, but Germany said it was willing to work with Sarkozy on the idea.

Merkel said negotiations on a text to more strictly tie together eurozone countries’ budgets were progressing well and also announced Paris and Berlin were ready to accelerate payments into a permanent fund for future possible bailouts that is due to come into force later this year.

“Germany and France are ready to review … to what extent our payments can be accelerated in a certain way and thus once again make our trust in and support for the eurozone clearly visible,” she told reporters.

European leaders are hoping to have the new budget regulations in place by the beginning of March.

They are also looking into ways of arming the the European Stability Mechanism fund, with its resources in one go, rather than putting in smaller tranches over several years under the current plan.

The meeting between Merkel and French President Nicolas Sarkozy, who have been at the forefront of efforts to combat the eurozone debt turmoil, came as the euro tested near 16-month lows against the dollar, amid new fears over the future of the bloc.

“The situation is tense, very tense,” acknowledged Sarkozy.

A recent slew of disappointing economic data, combined with renewed fears over the banking sector, have revived concerns that the eurozone is heading for a deep recession as the crisis shows little sign of easing.

Fuelling these fears, data earlier Monday showed that banks parked a record sum of cash at the European Central Bank, suggesting they are wary of lending to each other in the critical interbank market.

And for the first time, Germany sold five-year bonds with a negative yield, implying investors are rushing for the relative safety of debt issued by Europe’s top economy that has thus far proved resilient to the crisis.

However, there were also signs that even this safe-haven status could be called into question, as industrial production dived by a worse-than-expected 0.6 percent month-on-month in November.

Meanwhile, the crisis also appeared to be returning with a vengeance to Athens, where it began, with the International Monetary Fund reportedly expressing growing doubts about Greece’s long-term ability to reduce its debts.

A team of international auditors was due to return to Greece next week to assess the country’s economy after Prime Minister Lucas Papademos warned of an “uncontrolled default” in March if no further aid was forthcoming.

Merkel called for the “rapid implementation” of reform measures in Greece, warning that new bailout funds could not be paid out otherwise.

Amid renewed speculation that Greece could be forced out of the euro, she nevertheless stressed: “It is our intention that no country should leave the eurozone.”

Analysts were largely unimpressed by the meeting.

“The first Merkel/Sarkozy summit of 2012 produced little tangible results,” said Christian Schulz from Berenberg Bank.

“The growth initiatives lack detail and negotiations on other elements are ongoing. At least on Greece they remain committed to help the country,” added the analyst.

Merkel had sought to shift the focus from austerity to growth during the press conference.

“With a combination of solid finances and drivers of growth, we want to make clear that we are determined not only to maintain and stabilise the euro but also want a strong, modern and competitive Europe,” said the chancellor.

Traders appeared to shrug off the meeting, with little movement in European stock or bond markets.

The gathering in Berlin kicked off a flurry of diplomatic activity as European leaders seek to draw a line under the crisis.

Merkel was to host IMF chief Christine Lagarde for closed-door “informal talks” in Berlin on Tuesday, her spokesman said.

On January 20, Italian Prime Minister Mario Monti will host Merkel and Sarkozy in Rome, ahead of a meeting of eurozone finance ministers in Brussels three days later.

Speaking late Sunday in Rome, Monti denied that the euro was in trouble but warned of a “systemic crisis” in Europe driven by debt.

AFP/mdm

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ECONOMY

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.

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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.

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