Merkel cites euro’s ‘construction flaws’ as economy sputters

By Patrick Donahue

German Chancellor Angela Merkel urged euro-area leaders to coordinate more closely on economic policy and repair the “construction flaws” built into the 18- member currency union to overcome the debt crisis.

Speaking to a gathering of Nobel laureates in economics in the southern German city of Lindau on Wednesday, Merkel cited excessive debt, an aging population and an opaque European banking system as contributors to malaise.

“One can say we’re bearing the first fruits, but we also have to ask whether this is enough,” Merkel said in a speech. “We have a domestic market, but we have very little political coordination on the economy and no obligatory or sanctioned possibilities at all for not holding to our own promises.”

Growth in the euro area ground to a halt in the second quarter as the German economy contracted, casting a shadow over the recovery from the region’s debt crisis crisis that began in Greece in 2009.

Merkel acknowledged criticism of Germany’s austerity-first approach to the crisis and cited the task of finding agreement among 28 EU members and 18 countries in the euro area, each with its own policy approach, and one central bank.

“This is a rather unique process,” Merkel said.

Columbia University economist Joseph Stiglitz derided German-style austerity in an interview earlier in Lindau as a “dismal failure” in light of the sputtering economy and soaring unemployment.

“Now we see the enormous price that Europe is paying,” Stiglitz told Bloomberg Television. “Hopefully the reality of this failed policy will strike.”

The economies of Germany, France and Italy -- the largest in the currency union -- stagnated or shrank in the second quarter, threatening recovery and raising pressure on the European Central Bank to expand stimulus.

Euro-area inflation slowed to 0.4 percent in July, the weakest pace in almost five years, compared with the ECB’s goal of just under 2 percent. Unemployment was 11.5 percent in June, near the record 12 percent set last year as the region exited its longest-ever recession.