Merkel: Only a unified Europe can remain powerful

By Niko Price

Associated Press

Published: Wednesday, Jan. 25 2012 12:55 p.m. MST

German Chancellor Angela Merkel, delivers the opening address at the World Economic Forum in Davos, Switzerland, Wednesday, Jan. 25, 2012. The overarching theme of the Meeting, which will take place from Jan. 25 to 29, is "The Great Transformation: Shaping New Models".

Michel Euler, Associated Press

DAVOS, Switzerland — German Chancellor Angela Merkel insisted Wednesday that Europe will remain an economic power only if it deepens the integration that has caused it so many problems. Without that, she warned the global elite gathered in a Swiss ski resort, Europe will remain little more than a pleasant vacation destination.

The tone of Merkel's keynote address was not dramatically different from her measured norm, but it was positive enough to feed an emerging feeling among European power brokers that Germany — and hence Europe — is finally becoming convinced that it needs to do whatever it takes to save the euro from collapse.

"The message is that we are ready for more commitment. We are no longer making excuses," Merkel said. If Europe doesn't integrate further, she said, "we will remain an interesting holiday destination for a long time, but we won't be able to produce prosperity for the people in Europe anymore."

Merkel pledged to do what is necessary to protect the euro from collapse, and said greater European unity is needed to spark job creation and growth. However, she poured cold water on calls for Europe to ratchet up the financial firepower of its safety net for failing economies.

Germany is at the center of any rescue plan because it has the deepest pockets in Europe. And Europe is at the center of the global outlook because many fear a collapse of the euro could drag large parts of the world back into recession.

For months, Germany has argued that indebted countries much cut their budgets to the bone, and that their people must become poorer, in exchange for help in reducing their debt loads. But many say that will do little good if that very austerity causes growth to evaporate, making countries unable to pay back the debt that remains.

George Soros, the philanthropist and former financier, called Germany a task master imposing a strict anti-inflationary viewpoint on the rest of the continent. He said weaker eurozone countries have been "relegated to the status of third world countries" having to pay back debts in a foreign currency.

"The problem is that the austerity that Germany wants will push Europe into a deflationary death spiral. ... The economy will contract and tax revenues will fall. So the debt burden ... will actually rise, requiring further budget cuts and setting in motion a vicious cycle."

Merkel's government has been unwilling to back two proposals voiced as potential solutions to the 2-year-old debt crisis: "eurobonds" backed jointly by all eurozone countries, and stimulus that essentially involves getting the European Central Bank to print more money.

In the past month, business leaders and academics say they have become increasingly confident that Germany — once its back is against the wall — will go along with measures to boost growth, and possibly save Europe from deeper crisis.

"We are starting to see signs of a shift in sentiment towards Europe," said Baudouin Prot, CEO of French bank BNP Paribas.

He said the catalyst for the newfound optimism was a round of reasonably priced long-term loans to European banks by the European Central Bank, which caused spiking interest rates for European bonds — a key indicator of confidence in their ability to pay back the money — to drop.

"We are on the right track, but we need to keep moving forward. We need each country to implement financial discipline," Prot said. "But it's not just about debt reduction. Europe also needs a growth strategy, a series of initiatives to open up the market, support innovation and competitiveness."

He said all 17 countries that use the euro must improve their finances, and that Europe as a whole needs to act better as a whole. He also cautioned against overregulation of banks.

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