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Impasse between Germany, central bank weighs down Europe

David Mchugh Associated Press

FRANKFURT, Germany – Europe’s economy needs help – fast. Yet the two powers that could take action, the European Central Bank and Germany, don’t see eye to eye about what to do.

That leaves Europe’s currency union stuck in a dangerous policy limbo that now has investors worried.

Concern that the 18-country currency union, which accounts for 17 percent of the world economy, has no clear path out of its economic trouble is among the key factors in this week’s global market turmoil. After a mere four quarters of sluggish recovery from its crisis over government debt, the bloc saw no growth at all in the second quarter.

Not only that, but the eurozone has dangerously low inflation, which can depress growth over years, if not decades. A sudden decline in exports and industrial activity in Germany, long the region’s source of growth, heightened those concerns.

There are several big ideas about how to boost growth – for the long term.

Those ideas, however, are running into friction from Berlin, which is pushing for governments to balance their budgets and is skeptical of the ECB’s stimulus plans.

ECB President Mario Draghi has put forward a three-part strategy to help the eurozone: more monetary stimulus from the ECB, more spending from governments that can afford it and pro-business reforms from more troubled governments.

Draghi went ahead with his part: The ECB announced in September it would buy bundles of bank loans, a way of stimulating the flow of credit to businesses. In June, it also offered cheap, long-term loans to banks on condition they lend the money to companies. And Draghi has said the ECB is open to the more drastic step of buying large amounts of bonds to increase the amount of money in the financial system – so-called quantitative easing, or QE.

Yet governments have not followed Draghi’s advice to spend more where possible within EU rules. That has run into insistence from Germany, the eurozone’s dominant political and economic force, that governments focus on reducing their deficits.

Some countries, like France, have deficits above the EU limit of 3 percent of GDP. They argue that shrinking the deficit rapidly is now less important than boosting growth through government spending. Others, including Germany, have their public finances in order and could in theory increase spending.

But Berlin isn’t moving on this point.

“These rules must be applied credibly to all member states – only then can the pact fulfill its function as a central anchor for stability and above all for confidence in the eurozone,” Chancellor Angela Merkel said Thursday.

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