15th Aug 2018

Merkel proposes direct EU action on Greece

  • German chancellor Angela Merkel will meet her greek counterpart at the summit in Brussels on Thursday (Photo: The Council of the European Union)

German Chancellor Angela Merkel has suggested the European Union should play a greater role in tackling the embattled Greek economy.

She referred to a "common responsibility" towards the eurozone member following a meeting of centre-right EU leaders in Bonn on Thursday (10 December), in which she indicated pressure could be brought to bear on the national parliaments of countries in budgetary difficulties.

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"If, for example, there are problems with the Stability and Growth Pact in one country and it can only be solved by having social reforms carried out in this country, then of course the question arises, what influence does Europe have on national parliaments to see to it that Europe is not stopped," said the leader of Europe's largest economy in a speech.

"This is going to be a very difficult task because of course national parliaments certainly don't wish to be told what to do. We must be aware of such problems in the next few years."

The Stability and Growth Pact is a set of rules underpinning the 16-member euro area, limiting annual budget deficits to three percent of GDP and total debt levels to 60 percent of GDP.

The controversial comments, coming just hours before EU leaders are set to meet in Brussels for an EU summit, will add to the already immense pressure on the Greek government to tidy up its public finances. The topic is expected to be discussed informally at the EU leaders' dinner.

On Wednesday a spokesperson for the German government said Berlin had recently urged Greece in bilateral discussions to return to healthy public finances.

Greece's budget deficit is forecast to exceed 12 percent of its GDP this year, with the country's total debt levels expected to reach 125 percent of GDP in 2010 – the highest in the EU.

A fresh budget put forward last month by the country's eight-week old Socialist government aims to bring the deficit down to 9.1 percent next year.

But Greece's legacy of missed budget targets and failed efforts at structural reform has left many analysts sceptical the tough measures needed to turn the crisis-stricken economy around will really be taken. Pension reform in particular is expected to face severe opposition.

On Tuesday, credit rating agency Fitch downgraded Greece's debt to BBB+ - the lowest level for 10 years. Spreads on Greek bonds widened to 250 basis points above the German bund on Wednesday, while the country's stock market has lost 13.5 percent this week.

Ms Merkel's comments that the strength of the eurozone as a whole could be undermined by one weak economy mirror recent statements by the European Central Bank and the European Commission.

"A difficult situation in one euro-area member state is a matter of common concern for the euro area as a whole," EU economy commissioner Joaquin Almunia said this week.

EU leaders in Brussels are likely to seek further reassurances from the Greek prime minister, George Papandreou, that he is willing to take the necessary fiscal and structural measures to restore financial stability.

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