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.
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