Here’s What is Behind This German Minister’s Positive Outlook for the EU

“It is not the end of the crisis, but the beginning of the end of the crisis,” German Economy Minister Philipp Rösler told The Wall Street Journal regarding the euro zone’s lingering debt problems, giving a reality check to those who may be inclined to celebrate the recent calm in the markets.

He warned that for Germany, Europe’s largest economy, to return to solid growth, the euro zone must be stabilized. Despite the marked deterioration of the euro-zone economy in the final months of last year — the region slipped further than expected into recession in last three months of 2012 — he “expressed guarded optimism that European policy makers are getting the upper hand in the euro zone’s three-year-old sovereign-debt crisis,” according to the Journal.

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But the German economy did shrink in the fourth quarter, by 0.6 percent, as lasting uncertainty about the currency bloc’s economy caused companies to limit their investments. Rösler contends that this trend will begin to reverse in the next few months, and by the end of the year, investment could begin to rise again if the crisis continues to ease. “We are expecting strong growth during the course of the year and growth of 1.6% in 2014,” he commented. ”The precondition for that is that the euro zone continues to stabilize.”
Upcoming events could exacerbate economic problems, and the current calm may not be able to be sustained. Cyprus is seeking close to 18 billion euros, or $24 billion, in international aid to shore up its financial institutions, which were hurt by last year’s restructuring of Greece’s sovereign debt. As the Journal reported, any “false moves on the Cyprus situation” could give momentum to the crisis. Still, German lawmakers, across party lines, are unsure whether Cyprus poses an existential threat to the euro zone, a stipulation for any aid from the bloc’s bailout fund, the European Stability Mechanism.

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For Rösler, the cure for the current situation is continued fiscal reform and free trade. But the bloc’s most recent economic data suggests otherwise, at least regarding fiscal reform; while many European policy makers believe that fiscal austerity can fix the euro zone’s problems, that may not be the case, especially as the crisis worsened at the end of 2012. Yet, even though the region’s economy contracted in the fourth quarter at the fastest pace since peak of the world recession in early 2009, Rösler has told lawmakers not give up on fiscal reforms and turn to temporary measures, like currency devaluation, that will ultimately be ineffective…
“I am deeply convinced that it is better to strengthen competitiveness than to weaken the currency,” Rösler said.

Stimulus, he said, is also not the answer. The country’s massive economic stimulus in 2008 may have helped Germany maintain its relative economic strength, but he argued that similar measures would only hurt weaker euro-zone countries that have not undergone the necessary structural economic reforms that must accompany such an influx of funds.

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But free trade is a different story. Rösler was more than happy to accept President Obama’s offer to the European Union to discuss a trans-Atlantic free trade agreement, and he will lead the German negotiating team. “We have different ways of going about things in the U.S. and in the EU— whether in banking regulation or the financial-transaction tax, for example,” he said. “Nevertheless, I am deeply convinced that if there is good will, everything is possible.”

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