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Germany operates on different level from euro partners, admits Merkel

A lower interest rate could boost struggling economies by encouraging lending, but erodes the value of savings in the German economy, which has so far managed to avoid recession.

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Angela Merkel has voiced worries over a possible interest rate cut by the European Central Bank since it could harm the German economy.

In her strongest admission yet that Germany operates on a higher tier than its eurozone peers, she said: "The ECB is in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available.

"If we want to arrive at bearable interest rates again, we have to overcome the divisions of the European currency area."

A lower interest rate could boost struggling economies by encouraging lending, but erodes the value of savings in the German economy, which has so far managed to avoid recession.

"While the inherent problems with the eurozone one-size-fits-all monetary policy is nothing new, there's a growing realisation within Germany on just how difficult it will be to pull this off in practice," said Nina Schick, an analyst at think tank Open Europe.

Merkel's comments come as pressure piles on the ECB to cut its key interest rate after it emerged that private sector activity in the eurozone continued a steady decline in April.

Conflicting demands on eurozone monetary policy were also thrown into sharp relief by mixed messages from members of the ECB rate-setting board.

Vitor Constancio, ECB vice-president, told MEPs on Wednesday that the bank still has "some margin of manoeuvre" on its interest rate, which at 0.75pc is a record low for the ECB but still higher than rates at the Bank of England and the US Federal Reserve.

However, Joerg Asmussen, another governing council member, argued that looser monetary policy is "not an all-purpose weapon for any kind of economic illness" and an interest-rate cut would have limited effect since national banks do not always transmit lower lending rates to their customers.

Meanwhile, the fiery debate on whether Europe should ease austerity continued to rage as Asmussen urged struggling eurozone nations to stay the course on reining in expenditure, while the IMF's David Lipton called for governments to adopt pro-growth policies. "Delaying fiscal consolidation is no free lunch. It means higher debt levels. And this has real costs in the euro area where public debts are already very high," said Asmussen.

But Lipton, the IMF's deputy managing director, warned that European policymakers "must act now to strengthen the prospects for growth" or risk "falling into stagnation, which would have very serious implications for households, companies, banks and other bedrock institutions".
 

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