German Chancellor Angela Merkel warned on Thursday that there was no “magic bullet” to resolve the debt crisis and that deficit-fuelled growth would only catapult the eurozone back into trouble.
“Growth on credit would throw us back to the start of the crisis and therefore we will not do that," she said to applause in a speech to lawmakers in the lower house of parliament.
Reducing debts and bolstering growth were the “two pillars” of the crisis-fighting strategy, she reiterated, as a debate rages in Europe over whether to focus more on the economy or slashing deficits.
French president-elect Francois Hollande has said he wants to add measures to foster growth to a German-inspired fiscal pact designed to promote more budgetary discipline in the embattled European Union.
EU leaders will gather on May 23 in Brussels to thrash out a way forward and Merkel and Hollande will hold talks in Berlin next week in a bid to overcome differences on the European economy. “The European sovereign debt crisis will not be beaten overnight. There is no magic bullet,” said Merkel.
“So much has been talked about eurobonds or leveraging. All these measures have come and gone like magic weapons and it is recognised that they are not sustainable solutions. “Only one thing is and remains sustainable: accepting that overcoming the crisis will be a long and difficult process that will only be achieved if we attack the origins of the crisis, which are the horrendous debts and a lack of competitiveness in some European countries," she said.
Merkel's comments came after a Bundesbank economist suggested one potential way out of the crisis was to boost domestic demand in Europe's top economy.
“Germany would in this scenario have in the future an above-average inflation rate compared to the eurozone,” the central bank wrote. “But monetary policy would have to ensure that the average eurozone inflation rate corresponded to the target and that inflation expectations remained solidly anchored.”