Berlin advised to boost domestic consumption

FRENCH Economy Minister Christine Lagarde urged Germany in an interview published on yesterday to expand domestic demand because its large trade surplus threatened the competitiveness of other euro zone economies.

Greece is battling a debt crisis, and there is concern that its problems could undermine confidence in the euro and spread to other indebted euro zone countries like Portugal and Spain.

Germany and France, the euro zone's biggest economies, have been the driving force behind the single currency and Lagarde's remarks revealed the gap that has opened between them over how best to tackle the Greek crisis and other strains in the zone.

Euro zone finance ministers meet later yesterday, hoping to agree on a way of providing Greece with financial aid, should it request it, without breaking EU rules. A senior EU source has told Reuters bilateral loans and loan guarantees are among measures being considered.

Lagarde said Berlin should encourage domestic demand to boost its partners' ailing export industries. "It takes two to tango," Lagarde said in the interview with the Financial Times.

"Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs," Lagarde said. "When you look at unit labour costs in Germany, they have done a tremendous job in that respect. I'm not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence."

"You can't ask one player, as big as it is, to pull the whole group. But clearly there needs to be a sense of common destiny that we have together with our partners," she said.

The biggest difference between Germany and other euro zone members including France is on the issue of expanding Germany's internal demand, she told the paper.

Reuters