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German Chancellor Merkel warns markets worried about eurozone countries ability to repay debt


German Chancellor Angela Merkel

German Chancellor Angela Merkel

German Chancellor Angela Merkel

GERMAN Chancellor Angela Merkel said on Tuesday that financial markets were worried about the ability of some countries in the euro zone to repay their debt.

"There is a lack of confidence on financial markets that some euro zone states can pay back their debts in the long term. The world wonders how competitive euro zone countries are," she told a meeting of the Federation of Germany Industries.

Merkel said it required stamina to solve the crisis but the fiscal compact for budget discipline was a sign of progress, as was progress on banking supervision across the bloc.

The German leader said it was premature to talk of any recapitalisation of banks in the euro zone through European mechanisms before a supervisory body with robust intervention rights was in place.

She added that Germany's overall budget deficit was likely to come in at 0.9pc of gross domestic product (GDP) this year and that the country needed to continue to boost domestic demand.

Merkel also acknowledged that Germany was "not an island" that could disconnect from economic developments in Europe and the world economy.

But she placed the onus on Berlin's struggling euro zone partners to fix their own economies, rejecting the idea that Germany should relax its own productivity drive in order to help its partners.

"We need to take a deep breath to overcome this crisis," Merkel said. "We must make the efforts that will allow Europe to come out of this crisis stronger than it went in."

"There is a lack of confidence on financial markets that some euro zone states can pay back their debts in the long term," she continued. "The world wonders how competitive euro zone countries are."

The German leader said tough reforms in southern Europe had led to some convergence of unit labour costs across the euro zone, but made clear that there was still work to do.

She also expressed regret that the European Court of Justice had not been given stronger powers to intervene in national budget policies in the euro zone.

"We can't have support without controls. The two go hand in hand," Merkel said.

The German economy has held up well during the crisis, with unemployment holding near post-reunification lows. But there are signs that economic weakness across much of Europe and a slowdown in Chinese growth are beginning to bite.

Business sentiment is at its weakest level since early 2010, data released by the Ifo economic think tank showed on Monday. And some economists believe Germany could fall into a technical recession in the second half of this year.

"We are feeling that Germany is not an island. We are an export nation. Forty percent of our exports go to the euro zone, 60 percent to the European Union. We can't disconnect from European and global economic developments," Merkel said.

Merkel held up the fiscal compact for budget discipline and plans to introduce pan-European banking supervision as signs of Europe's progress.

She dismissed the notion that Berlin was slamming on the brakes in the creation of a European banking watchdog. In recent weeks, the German government has made clear that it sees a January deadline for putting this in place as unrealistic.

"We want stronger European banking supervision," she said.

Draghi's plan, unveiled at the start of the month, to buy the bonds of struggling euro countries, combined with a green light from Germany's Constitutional Court for Europe's new rescue fund have been welcomed by markets.

But worries have grown in the past week over Spain's reluctance to seek a bailout that would allow it to profit from the ECB's bond plan.