German Chancellor Angela Merkel acknowledged Thursday that Europe's lingering debt crisis will dominate this weekend's summit of the world's 20 most important economies in Mexico, but she stuck to her conviction that the region's crisis can only be solved by keeping a tight rein on government finances and introducing structural reforms.
"We must all resist the temptation to finance growth again through new debt," she said in an address to parliament before leaving to the gathering of world leaders. "We can only overcome the crisis when we tackle it at its roots, the high debt level and the lack of competitiveness in some member states," she maintained.
Europe's debt woes "will overshadow all other topics" at the meeting, with the eyes of the world's leaders on Germany as Europe's biggest economy to fix the crisis and to do more to spur growth, she said.
"But strengthening growth and budget consolidation must go together," she added.
Merkel is widely viewed as the European leader most prominently championing fiscal discipline and austerity measures, in particular for the southern European nations that are the hardest hit by the crisis, such as Greece, Portugal or Spain. But Germany's stance is coming increasingly under fire, with the political tide in Europe shifting toward seeking ways of fostering growth as the bloc is on the brink of a recession.
U.S. President Barack Obama has repeatedly called on European leaders to do more to overcome the crisis which poses a threat to the world economy. In Europe, France's new center-left President Francois Hollande has led efforts to forge a new growth initiative for the bloc's ailing nations. Germany's center-right government has recently embraced such an initiative in principle, but Merkel has ruled out using fresh money, insisting instead on reforms and a repackaging of existing EU funds.
"When 27 European nations simultaneously do nothing but tightening their budgets, then this is not a way out of the crisis, that is the way into recession," German opposition leader Frank-Walter Steinmeier said in a response to Merkel's speech.
Fiscal consolidation must be accompanied by growth stimulating measures, he said. "Ever new bailouts do not help if we strangulate growth in Europe," he added, referring to the rescue loan packages European nations provided to Greece, Portugal and Ireland to keep those nations afloat.
But Merkel stressed that those nations who have brought themselves into a situation where they needed to be bailed out by breaking the currency zone's rules limiting debt must work hard to restore trust and their public finances. "It is our duty to break the vicious circle of new debt and rules that are breached, again and again," she said.
However, as the crisis moves to engulf Spain and Italy, which are finding it increasingly difficult to refinance their debt, many European leaders have called on Germany to accept bolder steps to overcome the crisis such as introducing jointly guaranteed debt, so-called eurobonds.
Merkel maintained that Germany was open in the long-term to such wide-ranging reforms such as eurobonds, or a centralized banking supervision, but she insisted that those steps of pooling liability may only come after governments give away more power to guarantee genuine European oversight. They cannot be a quick fix to the crisis, she maintained.
"All those who are again looking at Germany in Los Cabos these days, who expect Germany to deliver a solution in a single drumbeat, who want to convince Germany of eurobonds, stability mechanisms, European deposit guarantees, yet more billions and many other things, to all those I say: Yes, Germany is strong. Germany is Europe's economic engine and stability anchor," she said. "But we also know that Germanys strength is not infinite, Germany's forces aren't unlimited either," she cautioned.
Europe can only be stabilized if its biggest economy does not overestimate its powers, but leads the bloc "step for step toward a political union," she said. "Europe is our destiny and our future."
Financial officials begin meeting Friday in Mexico's coastal resort of Los Cabos, and national leaders will start assembling two days later.
Juergen Baetz can be reached on Twitter at www.twitter.com/jbaetz
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