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EU urges Germany to stimulate domestic demand

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EU urges Germany to stimulate domestic demand

Schauble - Lagarde - Photo EU Council

(BRUSSELS) - The EU Commission on Wednesday called on Germany to stimulate demand in its domestic private sector, amid concern that Europe's biggest economy is too driven by its trade surpluses.

In a quarterly report on the eurozone, the EU's executive arm called more generally for reforms to even out the wide differences in competitiveness among member states.

"The observed divergence of current accounts and competitiveness are a source of potential concern," the commission said in its report.

"As a result, significant adjustment needs continue to exist," the report stressed.

The economic crisis, which plunged Europe into its worst recession since the 1930s, "has underscored the need for reforms in the euro area and for coordination across member states," according to the report, prepared by the commission's economic and financial affairs directorate.

Several European officials have recently stressed the strong divergence within the 16-nation eurozone of the current account surplus haves and have nots.

Germany at one end and debt-laden Greece at the other demonstrate the differences involved, with calls to stimulate spending in the former and austerity measures and bailout plans for the other.

France recently urged its big exporting neighbour Germany to cut taxes in order to stimulate domestic demand, amid growing tensions within Europe over how to balance the eurozone economy.

Germany, the world's biggest net exporter after China, is clinging to its traditional economic model of maintaining large domestic savings and huge external trade surpluses, to the frustration of its eurozone partners.

"An improvement in domestic consumption could, in particular, help us in terms of our exports towards Germany, which is our most important economic partner," French Finance Minister Christine Lagarde said on March 15.

German Finance Minster Wolfgang Schaeuble sees such foreign criticism as a compliment.

"Hidden behind the comments from our French friends is praise," Schaeuble said in a debate in the German parliament after Lagarde's outburst.

Such divergences have fuelled calls, in particular from Berlin and Paris, for an "economic government" for Europe, an idea that is anathema to Britain.

The commission is treading a fine line between championing Europe's free trade principles and seeking to avoid the kind of divergences which some fear could tear the eurozone asunder.

"We do not argue that surplus countries are too competitive," the EU executive stresses in its report.

"On the contrary, member states should strive to be as competitive as possible."

Nevertheless "export successes should translate into stronger domestic demand, thus boosting imports too," the report adds, in comments clearly aimed at Germany.

The report also tackled the problem of Greece, described as "in a league of its own here."

"Clearly significant policy action is needed," the commission said.

Under a mechanism agreed by EU leaders last week, Greece can request combined EU-IMF help as a last resort if it fails to find reasonable interest rates on the bond market to finance its ballooning deficit and debt.

Quarterly report on the euro area - March 
2010 - The impact of the global crisis on
competitiveness  and current account
divergences in the euro area

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