Meeting in Paris, Merkel and Sarkozy sought to address the challenge that has long bedeviled the 17 countries that share the euro. Although they use the same currency, they have lacked common oversight of tax and spending policies, leaving much of the continent vulnerable to the fiscal failures of individual nations.
The pair proposed that countries harmonize their tax policies, adopt a new tax on financial transactions and commit to balancing their budgets, as well as set up an economic council of national leaders that would meet at least twice a year. But the post-meeting news conference did little to cheer U.S. and euro-zone stock markets, which were down after the poor German growth report.
The abrupt slowdown in Europe’s largest economy comes at a time when Germany is expected to fund a major portion of the emergency loans extended to struggling neighbors such as Greece, Ireland and Portugal. Germany’s contribution is unpopular at home, and the new economic troubles could make it hard for politicians to sell any additional bailouts if Europe’s debt crisis worsens.
The new figures call into question whether Germany can remain the economic engine that officials in the United States and elsewhere have been counting on to power Europe’s recovery. Amid recent signs that the U.S. recovery is flagging, the news that Germany grew only 0.1 percent during the second quarter is an especially grim development for the world’s economy.
The German economy had bounced back from the recent global recession, looking — in the words of one analyst in Berlin — “like a swimmer in a neoprene suit.” But that strong growth, about 3.5 percent last year, was largely the result of a post-recession export boom that economists did not consider sustainable. The reality is more sobering: weak domestic consumption, stagnant wages, an aging population and underlying growth — estimated at barely more than 1 percent annually — that looks little different from that of anemic neighbors such as Italy and Spain.
“Trend growth is not that high,” said Thomas Mayer, chief economist for Deutsche Bank. “It would have been false to think that Germany would turn into a locomotive for Europe. That is not a viable proposition.”
According to a release from the Federal Statistical Office of Germany, flagging investment and household consumption were behind the slowdown — particularly disappointing for those, including U.S. officials, who have urged Germany to stoke local demand. The figures for June 2010 to this past June were more encouraging, showing that Germany grew 2.8 percent. But even that represented a decline.
Also discouraging were new figures released Tuesday for the entire region that uses the euro. Growth for the second quarter was only 0.2 percent, reflecting government austerity programs and slowing global economic activity.
The poor German showing is the latest in a spate of downbeat news for Europe. France, the euro zone’s second-largest economy, reported last week that it had essentially stagnated. And recent moves by European leaders to craft an expanded bailout for Greece, along with other steps to show they would defend the currency, were quickly discounted by the markets.
Although the crisis in Europe is ostensibly driven by high levels of government debt and annual deficits, it is also rooted in slow growth, with nations such as Italy and Spain struggling to expand fast enough that their tax base keeps up with their commitments to citizens and bondholders.
Germany’s growth in the past few years offered an example to weaker economies. A decade ago, the nation was one of Europe’s laggards, with exorbitant wages, expensive social commitments and the challenge of absorbing the former East Germany. In the euro’s early years, Germany violated the euro-zone requirement that countries keep their annual deficits below 3 percent of annual economic output.
But Germany revised its labor and tax rules to become globally competitive. Its stable of large multinationals benefited as China and other fast-growing developing nations snapped up German capital goods and high-end products.
Figures released last week, however, showed that German exports in June were down significantly from the month before and manufacturing dropped to its lowest level since October 2009.
In a country that has been spared the riots and demonstrations of Greece and Spain, the slowdown may reinforce a public sentiment — reflected in some opinion polls — that Germany should go no further in risking its own financial health to help its weaker neighbors.
At their meeting, Merkel and Sarkozy, whose countries account for about half the euro zone’s economic output, spoke of a unified response. In a joint statement, they called for what Sarkozy termed “a true economic government for the euro zone,” including a council of leaders from the 17 member countries that would meet at least twice a year.
Compared with some of the more dramatic steps that European officials have taken to address the debt crisis, such as establishing a trillion-dollar bailout fund last year, the proposals offered Tuesday were more evolutionary, Merkel said. By bringing the economic and social policies of the euro nations into sync, the region could “regain confidence step by step,” she said.
The proposals were short on details, and some analysts said they had heard similar ideas before. Over the years, European leaders, particularly from Germany, have offered various ways to control euro-zone spending, but to little effect. National parliaments would still have to approve the proposed measures, such as constitutional amendments to require a balanced budget, and governments would still have to live up to them.
“They have not given any details on what they feel economic governance should look like,” said Daniela Schwarzer, an expert on European integration at the German Institute for International and Security Affairs. And if the new economic council meetings amounted to no more than the latest in a long series of summits, she said, “that is nothing substantially new.”