August 25, 2014 / 2:37 PM / 5 years ago

More weak German data as French government implodes on euro zone policy split

BERLIN/PARIS (Reuters) - The euro zone’s flat-lining economy took another hit on Monday when data showed German business sentiment sagging for the fourth month running, while a row over the lack of growth led the French government to resign.

General view of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014. REUTERS/Ralph Orlowski

Politicians and policymakers, meanwhile, were digesting European Central Bank President Mario Draghi’s about-face on Friday, in which he called in a landmark speech for governments to use fiscal stimulus to revive the euro zone economy.

His comments were similar, if less direct, than those made on Sunday by leftist French Economy Minister Arnaud Montebourg, who condemned fiscal “austerity” and Germany’s “obsession” with budgetary rigour, triggering Monday’s government resignation.

The euro zone economy registered no growth at all in the second quarter. At the same time, unemployment remains high and inflation is running at such low levels that deflation is a threat.

German Chancellor Angela Merkel, visiting one of Europe’s few bright spots, recovering Spain, blamed some of her own country’s decline in the second quarter on the Russia-Ukraine crisis, over which tit-for-tat sanctions threaten trade.

The Munich-based Ifo think-tank echoed some of those sentiments as it reported its business climate index, based on a monthly survey of some 7,000 companies, fell to a worse-than-expected 106.3 from 108, the lowest level in more than a year.

The findings gelled with data earlier in the month on the second-quarter contraction in Germany, the bloc’s biggest economy.

“I nonetheless expect that our overall annual growth rate will be good, if nothing dramatic happens,” Merkel said in Santiago de Compostela in northwest Spain.

Ifo economist Klaus Wohlrabe, however, said his institute expected growth to be “close to zero” in the third quarter, many economists having forecast that Germany would regain momentum in that period.

GROWTH VS AUSTERITY

In the euro zone’s second-largest economy, French President Francois Hollande asked his prime minister to form a new government in the aftermath of the call by Montebourg and other rebel leftist ministers for an economic policy U-turn.

France’s government wants to cut the country’s deficit and reduce the tax burden on companies by making 50 billion euros of savings on public sector costs.

The economy has failed to growth for two consecutive quarters and France is failing to meet its European Union-imposed deficit targets. It has asked the EU for some leniency on the latter, but that would require commitment to reform.

Hollande has asked current Prime Minister Manuel Valls to form a new government, suggesting he wants to stick with his current policies.

If Hollande sacks Montebourg, who is viewed as a potential presidential rival, he would risk seeing the ousted minister take with him a band of rebel lawmakers and deprive him of the parliamentary majority he needs to push through reforms.

The row in France, however, is part of a larger debate among Europe’s leaders about whether fiscal austerity aimed at bringing debt under control is the right policy at a time of economic stagnation.

The ECB’s Draghi suggested in a high-profile speech last Friday at the central banker’s conference in Jackson Hole, Wyoming, that it may not be.

He said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy, adding: “and I believe there is scope for this”.

“It is admitting that the recovery might not come, that the euro zone’s problems go beyond structural reforms and austerity measures,” said ING economist Carsten Brzeski.

There had previously been a tacit coalition of ECB support for German-style fiscal austerity.

Additional reporting by Paul Carrel, Alexandra Sage and John Irish; Written by Jeremy Gaunt; Editing by Hugh Lawson

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