25 Apr 2012

German chancellor defends budget discipline

10:21 am on 25 April 2012

Germany has defended its pro-austerity stance, with Chancellor Angela Merkel and her foreign and finance ministers calling for Europe to stick with a policy of fiscal discipline despite political uncertainty.

Financial markets in the 17 countries that use the euro have been shaken by concerns that an agreement on strict deficit targets agreed to by European leaders earlier this year is beginning to unravel.

In France, Socialist candidate Francois Hollande edged ahead with a narrow lead in the first round of presidential elections with a pledge to renegotiate the pact.

The Netherlands faces early elections after its minority government collapsed over a failure to agree on austerity measures there, while Spain - which is going through a harsh program of cuts and tax increases - has announced it is entering a recession.

Chancellor Merkel did not specifically mention the deficit agreement pact in a speech in Berlin on Tuesday, but noted that, in its early years, West Germany ran up barely any debt and said that "today, we have to get back to that situation."

Finance minister Wolfgang Schaeuble said he was confident the deficit agreement would be ratified in all countries.

Every member of the 27-country European Union, except Britain and the Czech Republic, have signed the treaty but it has not made it through ratification by the parliaments. Ireland will hold a referendum.

Germany's budget deficit is well under the limit of 3% cent of gross domestic product that euro zone countries are supposed to observe, but its total debt amounts to 81.2% of GDP - well above the official 60% per cent limit agreed by the euro zone.

Stock markets in Europe Tuesday recovered some of the ground they had lost in the previous day's turmoil though concerns about the debt crisis pushed up yields on Italian two-year bonds and Spanish short term debt.