WRAPUP 1-Euro zone must tackle yawning economic gaps-Merkel

* Rescue package only bought time to tackle problem – Merkel

* Euro speculation due to gap between strongest and weakest

* Austria calls for EU debt cap

* Focus must shift to controlling state debt- Rehn

By David Stamp and Brett Young

BERLIN/HELSINKI, May 16 (BestGrowthStock) – German Chancellor Angela
Merkel said on Sunday that a $1 trillion EU rescue plan had only
bought the euro zone time to tackle its fundamental problem — a
yawning gap between its strongest and weakest economies.

Merkel denounced what she called speculation in the past
week against the euro currency. But Europe’s leaders could calm
the situation only by sorting out the big economic divergence
among the 16 countries which use the common currency.

“We’ve done no more than buy time for ourselves to clear up
the differences in competitiveness and in budget deficits of
individual euro zone countries,” she said. “If we simply ignore
this problem we won’t be able to calm down this situation.”

Addressing trade union members, Merkel backed the huge
rescue package which European Union leaders agreed a week ago to
to prevent Greece’s debt crisis infecting other weaker euro zone
members and even destabilising the global economy.

But Merkel, who until recently had been reluctant to back
bailouts for Greece and other nations, said far more was needed.

“In the past week we have experienced … how there has been
speculation against the euro, our currency,” she told the German
Federation of Trades Unions, adding the extent of speculation
would have been inconceivable only a short while ago.

“This calls for more regulation,” she said in a speech. “But
unfortunately this speculation was, and is only possible because
there are considerable differences in economic strength and
respective indebtedness between the member states of the euro.”

The euro (EUR=: ) tumbled more than four percent against the
dollar last week to an 18-month low of around $1.2350.
[ID:nN14198937]

Merkel leads Europe’s biggest, and probably strongest
economy. Germany’s budget deficit last year amounted to 3.3
percent of its gross domestic product compared with 13.6 percent
in Greece, which can no longer borrow on international markets.

Public debt was high in Germany at 73 percent of GDP, but
dwarfed by that of Athens, which is heading towards 150 percent.

Austrian Finance Minister Josef Proell said the EU should
limit member countries’ debt. This “would lead to a clear cap on
new debt, strict budgetary discipline and balanced budgets in
Europe”, he told Germany’s Die Welt newspaper. [nLDE64F04X]

DOWNWARD SPIRALS

Europe’s economic chief joined calls for the spotlight to
swing onto the debt piles which euro zone governments have
accumulated, to prevent the bad from pulling down the good.

“Because euro zone countries’ economies are tightly
connected by a currency, it is important to prevent a weak
economic policy in one country from threatening the success of
others,” said European Union Economic and Monetary Affairs
Commissioner Olli Rehn. [nLDE64F00L]

“Economic policy monitoring has earlier paid attention
almost entirely to deficits, and debts have grown excessively
large,” he wrote in Finnish newspaper Helsingin Sanomat.

“In the future the development of state debt must be
followed more closely than before and possible downward spirals
must be cut off in time.”

Rehn said EU action had prevented Greece’s problems from
spreading, but the crisis also revealed a flaw at the heart of
the euro zone’s economy. “We stopped the spread of a bushfire in
Greece from becoming an uncontrollable forest fire,” he said.

“The economic and monetary union’s problem has been that the
monetary pillar has been from the start stronger than the
economic one. The crisis has shown that both are needed.”

The euro zone has a single monetary policy, with interest
rates for the entire bloc decided by the European Central Bank.

Budget policy remains the preserve of the 16 governments and
parliaments, although Rehn has proposed forcing countries to
submit their budget plans to Brussels before they go for
parliamentary debate and approval.

An opinion poll out on Sunday showed the political price
that some European leaders must pay for imposing austerity to
get their budget deficits under control.

Spain’s conservative opposition has more than doubled its
lead over the government since new spending cuts were imposed.

A Demoscopia poll in the newspaper El Pais showed the
Popular Party has a 9.1 percentage point advantage over Prime
Minister Jose Luis Rodriguez Zapatero’s Socialists, up from 4.2
percentage points a fortnight ago. The poll was taken on May 13,
one day after cuts in civil servants’ pay and a pension freeze
were announced. [ID:nLDE64B14P]

However, another poll showed that an austerity package
Greece imposed in return for a 110 billion euro ($140 billion)
EU and IMF bailout has had little effect on support for the
government. [ID:nLDE64F02J]

Growth Stocks

(Additional reporting by Holger Hansen in Berlin, Maria Sheehan
in Frankfurt, Angeliki Koutantou in Athens and Elisabeth O’Leary
in Madrid; editing by Jon Boyle)

WRAPUP 1-Euro zone must tackle yawning economic gaps-Merkel