House speaker John Boehner answers questions from reporters on Capitol Hill in Washington DC, February 2 (Bryant Avondoglio)

American president Barack Obama asked Republican leader John Boehner for a “clean” increase in the nation’s legal debt limit on Wednesday, one that is not conditioned on a plan for deficit reduction. The conservative House speaker said “no” but has also ruled out tax increases which the president believes must be part of a “balanced approach” for fiscal consolidation.

White House spokesman Jay Carney blamed Boehner and his Republican Party for jeopardizing the country’s financial credibility. “The president does not believe that the full faith and credit of the United States, its commitment to pay its bills and its obligations, should be held hostage to a political ideology,” he said after Wednesday’s meeting.

Republicans argue that they are looking for pragmatic solutions to solving the nation’s debt crisis when Democrats have rejected any proposed spending reductions and reforms.

To demonstrate Democrats’ intransigence, Republicans brought the president’s own budget proposal for fiscal year 2013 up for a vote again. As expected, it was overwhelmingly defeated in both the House and Senate.

The Democratic majority in the upper chamber hasn’t produced a proper budget throughout Barack Obama’s presidency. The conservative majority in the House of Representatives, this year and last, introduced budgets that were voted down in the Senate.

For three years, the United States have had to borrow more than $1 trillion annually to balance their budget. The national debt is approaching $16 trillion, several hundreds of billions of dollars short of the legal debt ceiling of $16.4 trillion.

The cap was most recently raised by $900 billion in July 2011 after weeks of strenuous negotiations between Democrats and Republicans. As part of their agreement, federal spending projections for the next ten years were reduced by $917 billion with $21 billion worth of cuts implemented in 2012.

A congressional committee was tasked with finding up to $1.2 trillion in additional savings over the 2013-2021 time period. Because the parties failed to reach a compromise, $1.2 trillion in cuts, split between defense and domestic spending, were automatically enacted. Republicans are now scrambling to avert those reductions in national security.

The battle lines for the upcoming debt debacle have already been drawn. Republicans don’t want to cut military spending nor raise taxes. Democrats don’t want to reform entitlement programs like Medicaid, which subsidizes health care for the poor, and Medicare, which pays medical care for seniors.

With Social Security pension payments, these mandatory spending outlays are mainly responsible for America’s ballooning deficit projections.

The Congressional Budget Office estimates that by 2021, more than half of federal spending will have to be allocated to Medicaid, Medicare and Social Security. Along with defense, interest payments on the debt and unemployment insurance, it would be nigh impossible for the Federal Government to continue to fund education and other domestic programs unless taxes are raised substantially.

Republicans have proposed to privatize Medicare and reduce Medicaid payments. Democrats have ruled out such reforms. As Nancy Pelosi, the left’s leader in the House of Representatives, put it, they will not “reduce the deficit or subsidize tax cuts for the rich on the backs of America’s seniors and working families.”

On Wednesday, Pelosi accused Republicans of “manufacturing” a crisis by demanding spending cuts for more borrowing.

“Cuts” aren’t really cuts though. They are reductions in projected spending increases. In real terms, public spending will grow every year—under the Republican plan, by 4 percent on average; under the president’s plan, by 5 percent. Republicans would spend roughly $40 trillion over the next ten years; Obama would spend $45 trillion. If neither plan is enacted, the CBO estimates outlays worth $47 trillion over the same period.

President Lee Myung-bak of South Korea (Reuters/Petar Kujundzic)

On Monday, South Korean president Lee Myung-bak visited Myanmar and promised to extend loans and grants to the poverty stricken country.

The surprise visit came as Japan and South Korea have stepped up their diplomatic engagement in Southeast Asia over the last month, which, in turn, comes on the heels of closer engagement by the United States since 2009.

This stems not only from a desire to gain access to the region’s natural resources but more importantly, to bolster their soft power in the Mekong region, an area that is becoming increasingly important as concerns persist about Chinese foreign policy amid the rapid modernization of the People’s Liberation Army. However, while the Mekong countries are interested in the economic and political benefits from closer relations with the United States, they are mindful of the risk of antagonizing China.

The Mekong countries include Cambodia, Laos, Myanmar, Thailand and Vietnam, even though the Mekong River begins on the Tibetan Plateau in China’s Yunnan Province where it is known as the Lancang River. The Mekong is revered by the locals and is considered the lifeblood of Southeast Asia with an estimated sixty million people dependant on it for food, water and transportation.

Lee’s visit to Myanmar, the first by a South Korean president in twenty-nine years, came after a regional summit in Thailand last week where South Korea promised to double its development aid to the Mekong region by 2015. During a summit in April, Japan pledged ¥600 billion ($7.4 billion) in aid, which was a renewal of a prior commitment of ¥500 billion that expired this year. Japan also wrote off half of the ¥500 billion ($6 billion) in debt that Myanmar owed it.

The United States jump started their engagement back in 2009 with the Lower Mekong Initiative, targeting Cambodia, Laos, Thailand and Vietnam with increased development aid. Washington also began lifting sanctions on Myanmar when it adopted political reforms and held what was considered by observers a mostly free and fair election in April.

Myanmar was cut off from Western investment and international aid for the last thirty years while it was under military rule which gave China virtually free rein over the country’s resources.

The Americans have also taken more overt measures to demonstrate their presence in the region. Last month, the United States held noncombat maritime exercises with the Vietnamese navy and military maneuvers with the Philippines.

There is still tension between China and the Philippines over the Scarborough Shoal and between China and Vietnam, which have a dispute over the Paracel Islands, in addition to the other disputes with nations fronting the South China Sea.

The governments in the Mekong region are faced with a delicate balancing act. While they are open to greater engagement with the United States and their allies due to concerns over China’s rise, they are careful not to embrace them too tight and alienate the Chinese.

China’s long term security plans in the region are often vague and cloaked in secrecy. On top of the lack of transparency, China has refused to submit to a multilateral forum for negotiations with its neighbors over the territorial disputes in the South China Sea.

Instead, it remains firm in demanding bilateral talks, fueling suspicion that it prefers this as a way to exercise leverage over smaller countries for a more favorable outcome for itself.

Complicating matters for a negotiated outcome to these disputes is that governments have often resorted to using the issue to stoke nationalism in their countries to rally support for the government, making it harder for them to compromise now.

Given the strategic uncertainty and the fear of being bullied, Mekong countries share an interest with the United States in balancing China’s presence in the region. The Obama Administration’s much heralded Asian “pivot” is clear evidence of the importance which the Americans attach to Asia, a part of the world it has identified as strategically vital to the United States in the twenty-first century.

The administration’s dual approach is to reassure nervous allies about American staying power in Asia and to balance China’s rising power.

The distrust, lack of transparency and outstanding territorial disagreements between China and its neighbors means that relations in Southeast Asia will remain unsettled and vulnerable to flareups. Going forward, given their size and location, the Mekong countries will remain in the difficult position of trying to accommodate both sides, while staying out of what is shaping up to be a wary relationship between China and the United States.

Athens, Greece, December 10, 2011 (Helen Sotiriadis)

With the collapse of multiparty talks to form a new government in Greece, the country’s future in Europe’s single currency area is seen as highly precarious.

Ordinary Greeks are pulling their deposits out of local banks in anticipation of a eurozone exit which could trigger a currency devaluation. The country’s president said on Tuesday that at least €700 million in savings had been withdrawn before day’s end.

Investment bank JPMorgan Chase raised the odds of Greece leaving the euro to 30 to 50 percent. It predicts a “massive capital flight” to escape capital controls and the printing of IOUs (“I owe you”) debt papers which would temporarily serve as alternative currency while Greece prints new drachmas.

Worse for the rest of Europe, a Greek exit and likely sovereign default—as it would lack the international financial aid necessary to make payments—could trigger a “capital flight from [the] rest of [the] periphery.”

If periphery countries then impose capital controls, the monetary union is effectively dead, as one country’s euros are then not the same as another country’s euros.

The precedent is Argentina which defaulted on its debt obligations in 2001 and simultaneously depegged the peso from the dollar. Dollar deposits became peso deposits and it was illegal to make any more payments in dollars.

As a result of the peso‘s subsequent devaluation relative to the dollar, ordinary Argentinians effectively lost up to 80 percent of the value of their savings.

The policy was designed to prevent a collapse of Argentina’s banks and would likely have to be replicated in Greece if its financial institutions also lose access to European Central Bank funding.

The danger is that savers in other heavily indebted eurozone nations, including Italy, Portugal and Spain, fearing default and devaluation in their own countries, will pull their money out of the banks and drive it to Germany or Switzerland. Such a bank run could herald the collapse of the currency union.

Some are willing to risk it. German weekly Der Spiegel says Greece must leave the euro. “The attempt to retroactively bring the country up to speed through reforms has failed.” If the Greeks have their own currency again and devalue it, exports would be cheaper. “The Greek economy could become competitive again.”

This would be true if Greece were an exporting nation but as Der Spiegel also notes, it has actually a tiny industrial base and is (or was) hugely dependent on public spending. The total value of its imports is twice the size of its exports.

The costs of imports would skyrocket if Greece left the euro, deepening a recession that has already shrunk the country’s economy by nearly a fifth since the beginning of the financial crisis in 2008.

One out of five Greeks is out of work. The youth unemployment rate is over 50 percent. Changing the currency won’t change any of that unless market reforms are simultaneously implemented to make the Greek economy more competitive.

Greece was supposed to implement liberalizations in the last two years as a condition for the financial support it received from its European partners and the International Monetary Fund but progress has been markedly slow. If the government in Athens—possibly a left wing government that doesn’t believe in austerity—is no longer under pressure from the specter of default, there will only be less incentive to rein in public spending and reform.

What is more, if Greece regains its own currency, it also regains the ability to print money to try to inflate its debt away. An expanding money supply would no longer be offset by growth elsewhere as is the case in the eurozone. The value of Greeks’ money would first decrease as a result of switching to the drachma and possibly again as a result of hyperinflation.

So for Greece, there is no easy way out. If it tries nonetheless, the rest of Europe can only hope that investors and savers don’t expect other countries will follow.

Prime Minister Mykola Azarov of Ukraine during a conference with European Union officials in Brussels, May 15

Ukraine’s prime minister urged European leaders not to draw an “iron curtain” around the union and promised to wean his country from Russian influence.

Ukraine will increase its natural gas production by as much as 25 percent in the next three years to decrease its dependence on costly Russian imports and wriggle free of Moscow, Prime Minister Mykola Azarov told The Wall Street Journal. He added that shale gas holds the key to eventually “covering all of Ukraine’s needs.”

The United States Energy Information Administration estimates that Ukraine has the third largest shale gas reserves in Europe at 1.2 trillion cubic meters, some twenty times its annual consumption.

Russia holds significant leverage over Ukraine as the supplier of nearly two thirds of the sixty billion cubic meters of gas it uses every year. Twice in recent years has it turned off supplies amid price disputes. Russian state oil company Transneft said in February that it was in talks with the Czech Republic and Germany to bypass Ukraine’s export infrastructure entirely. Gazprom blamed Ukrainian siphoning of gas supplies for shortages in Europe last winter.

For more than two years now, Moscow has had a better friend in Ukraine and its president Viktor Yanukovych who doesn’t want his country to join the European Union. Even he is reluctant to give Russia more control over Ukraine’s gas transit system though because it is the only leverage Kiev has over its neighbour.

Yanukovych replaced the pro-Western president Viktor Yushchenko in February 2010 amid allegations of Russian meddling in Ukraine’s election.

European leaders have since cooled to prospects of Ukrainian membership. In recent weeks, German president Joachim Gauck and other heads of state fiercely criticized Yanokovych’s government over its treatment of former prime minister Yulia Tymoshenko who was found guilty in October 2011 of abuse of office and incarcerated. Tymoshenko alleged that she has been abused by prison guards and only gave up a hunger strike when Ukraine allowed German doctors to treat her.

Azarov accused the Europeans of using the Tymoshenko case to delay Ukraine’s integration. He brushed aside threats of a boycott of the European football championship which starts in Poland and Ukraine next month. “We do not accept the principle of diktats and ultimatums,” he said.

Pipeline construction in the Black Sea (Gazprom)

Compromise is needed between the European Union and Russia regarding the Trans Caspian Pipeline to ensure regional energy security.

Believing the European Union’s 2009 Third Energy Package was designed to undermine Russian and Gazprom’s interests, the current discussions concerning the Trans Caspian Pipeline, the third round of negotiations, have stalled with neither side willing to relinquish to the demands of the other.

The Southern Gas Corridor has not been a contentious topic in the past. However, the Third Energy Project has created a rift between Europe and Russia on energy security.

Under the agreement, Russia demands that Gazprom should receive the entire supply chain while the EU would receive energy supplies from Turkmenistan. Concerns have arisen regarding Russia’s eventual attempts to use supply routes as a “weapon,” and the Europeans do not believe that Turkmenistan will be able to remain stable without diversifying the nation’s export portfolio, so supplies over the long term may not be realistic.

Russia’s pressure to hand Gazprom the entire supply chain has pushed the EU to attempt to negotiate with Azerbaijan and Turkmenistan directly. Russia has attacked this approach citing unresolved claims of energy supplies throughout the Caspian Sea basin.

Analysis

The European-Russian spat over the latter’s gas monopoly is a classic example of one international player willing to counter the other’s attempt to tighten its control of energy supply routes to wield more influence.

Russia’s bet on energy has been more of a necessity than of a premeditated policy choice. In the absence of structural economic reforms capable of strengthening Russia’s competitiveness in world markets and bringing it closer to the technological edge, its only hope is to use abundant mineral resources to generate long term revenue.

The volatility of energy prices has long been a scourge for those countries which are overly dependent on their oil and gas. Thus, by maintaining its monopoly in Europe, still Russia’s main client, Gazprom is trying to ensure a stable price level and consequently, a source of stable income for the Russian Government.

With the Third Energy Package gradually implemented, Gazprom risks losing its transit role, one which promises in this energy equation the biggest margin of influence.

As long as the EU is ready to tolerate exceptions for the Russian gas company, Moscow will be willing to let the Trans Caspian Pipeline move closer toward completion. This is because the pipeline is not capable of becoming a credible substitute for Russian imports in the near future—-considerable is investment needed and tehre are legal problems to resolve—and because Russia will still maintain some control over it by using its influence in the Caucasus and Central Asia.

Wikistrat Bottom Lines

Steven Aiello, Michael Breen, Tatyana Bolton, Patrick Hall, Miguel Nunes Silva and Georgiy Voloshin contributed to this analysis.

Greek leftist leader Alexis Tsipras arrives at the presidential palace in Athens for coalition talks, May 13 (AP/Kostas Tsironis)

Greek left wing parties rejected proposals to support a technocratic government on Tuesday, a last ditch effort by Greece’s president to avert new elections and possibly bankruptcy.

“We don’t want to consent to any kind of bailout policies, even if they are implemented by nonpolitical personalities,” a spokesman for the far left alliance SYRIZA said. Party leader Alexis Tsipras earlier ruled out any coalition that adheres to the conditions of Greece’s two international bailouts.

The southern European country’s traditional ruling parties have supported a technocratic government for the last six months but were punished in last week’s election, falling two seats short of a majority between them.

The conservatives and socialists have since been in talks with parties that campaigned against austerity. If they cannot agree to form a government, there will likely be new elections in June. SYRIZA would come out the strongest, according to opinion polls, and may be able to form a coalition with the communists and other left wing parties.

June is also when the latest tranche in European and international financial support is due. If Greece does not advance its program of fiscal consolidation and market reforms, its European Union and International Monetary Fund paymasters could withhold bailout funds, raising the specter of a Greek sovereign default.

Greece received €110 billion in financial assistance in 2010 and was promised a second bailout worth €130 billion in February. More than half of Greece’s €350 billion debt was subject to “haircuts” at the time. Banks and private investors were forced to write off billions in Greek bonds.

Jean-Claude Juncker, Luxembourg’s prime minister and head of the group of eurozone finance ministers, insisted on Monday that talk of Greece leaving the currency union is “nonsense” and “propaganda” but German finance minister Wolfgang Schäuble told the Welt am Sonntag newspaper that, “We cannot force a country to stay in the euro.” He added, “Questions have to be asked in a European context—what is the best for Europe? As a rule, that is the best for Germany, too.”

Last week, European Commission president José Manuel Barroso suggested in an interview with Italian television that Greece could be made to withdraw from the euro if it rejected the bailout agreement. “Of course, the agreements have to be respected,” he said, “and if they are not respected, it means that the conditions do not exist to continue with a country.”

The city of Medina in Saudi Arabia, September 27, 2008 (Noushad Akambadam)

Arab Gulf states on Monday delayed plans to deepen political cooperation between them, reflecting unease on the part of smaller nations in the six member Gulf Cooperation Council about handing more power to Saudi Arabia.

Saudi Arabia and its neighboring Arab Gulf kingdom of Bahrain had expected to announce plans for increased economic and security cooperation in a move that Riyadh hoped would have spurred political integration all of the Sunni monarchies on the peninsula.

With rival Iran pursuing an uranium enrichment programs which neighboring Arab countries and the West suspect is designed to develop nuclear weapons and sectarian tensions between Sunni and Shī’ah Muslims rising across the Middle East, forming a union “has become urgent,” Bahrain’s prime minister Khalifa bin Salman said on Sunday. Several of his allies disagreed.

Qatar enjoys the freedom to pursue a foreign policy that is more independent of the United States than Saudi Arabia’s and like the United Arab Emirates, it fears Saudi domination.

The emirates pulled out of a planned monetary union among the GCC states in 2009 after Saudi Arabia was voted as the host of a common central bank. Unable to agree to the creation of a joint missile shield, they also purchased their own defense system late last year.

Kuwait would have difficulty joining “with countries whose prisons are full of thousands who are guilty of speaking their minds,” the speaker of the emirate’s parliament said in February of last year in a reference to the Saudi kingdom. Persecution of the Shī’ah minority sect has only increased in Saudi Arabia with the onset of the “Arab spring” which forced its longtime Egyptian president and ally Hosni Mubarak out of office last year.

In December, Saudi king Abdullah made an impassioned appeal for fellow Sunni rulers to join forces. “You all know that we are targeted in our safety and security,” he told his neighbors at the time.

Saudi Arabia’s foreign minister Saud bin Faisal Al Saud added last month, “The threats of all kinds require the hard works of the GCC countries to shift from a current formula of cooperation to a union formula acceptable to the six countries.” He didn’t specify what threats the Gulf states face but their leaders suspect that Iran is conniving with Shī’ah opposition in their countries to destabilize the Sunni regimes.

Because they have common interest, the delay came as a surprise. The meeting of Arab Gulf leaders on Monday was expected to endorse what has happened on the ground—an effective union between Bahrain and Saudi Arabia. The island nation is highly dependent on its neighbor for financial assistance, trade and military protection. Saudi troops that were deployed to Bahrain in May to quell a largely Shī’ah uprising against the ruling Al Kalifa family have yet to depart.

View of the Houses of Parliament from Whitehall, London, England, March 31, 2004

The economic proposals which the British Government announced in the Queen’s speech on Wednesday have been largely overshadowed by talk of reforming the House of Lords, the upper house of Parliament.

The coalition of Conservatives and Liberal Democrats intends to trim down the size of the Lords to three hundred. Of these, 80 percent would be elected according to a proportional voting system.

Although there was crossparty support for House of Lords reform in the 2010 general election campaign, it appears that this may no longer be the case. Some see it as the straw that could break the camel’s back for the coalition.

Liberal Democrat leader Nick Clegg was mocked in Parliament by Conservatives, backbenchers of his own party and Labour members as he delivered a speech on the proposed reforms. Labour and Liberal Democratic parliamentarians believe that Clegg should have stuck to his guns and demanded a wholly elected second chamber instead of compromising with the Conservatives.

At a recent meeting of the Conservative 1922 Committee, many normally loyal backbenchers also voiced their disagreement with the proposals. Gavin Barwell, a Conservative member for Croydon Central in south London, said that a backbench revolt “will be off the scale” and it will make last year’s revolt over the European Union “look like a tea party.”

Both Baroness Warsi, Conservative Party co-chair, and Phillip Hammond, the defense secretary, have added to the tension in recent days with the baroness arguing that the Lords “should not be the government focus” and Hammond saying, “the reforms should not be a central issue.”

These quotes can add more tension to the coalition and will have been received badly by Liberal Democrats as the reform of the House of Lords is their only remaining “flagship policy” since the referendum on the alternative vote in May 2011 failed to deliver a majority for electoral reform.

So could these remarks, the fact that Labour is planning to oppose the bill in the Commons and the fact that the Lords are planning to oppose it, mean that not only the reforms will not pass but in the process could lead to the beginning of the end for the coalition?

Looking back to history, the Liberals in 1911 only managed to take away the Lords’ power to veto legislation. In 1917, they recommended reforms were never enacted after the Lords rejected them multiple times and finally, Tony Blair and New Labour in their election manifesto for 1997 stated that they intended to reform the Lords to an elected second chamber however by 1999, they had not even manged to remove all the hereditary peers.

With even more opposition than Labour faced brewing, not to mention the fact that many senior legislators see the lords as a way to supplement their pension, it is doubtful that the reforms will be passed by the end of this parliament. Britain could end up waiting another hundred years before the composition and powers of the House of Lords is reformed in a meaningful way.

Israeli prime minister Benjamin Netanyahu talks during the weekly cabinet meeting in Jerusalem, September 11, 2011

Just a week ago, members of the Israeli parliament were debating on whether to disband the legislature in order to usher in early elections in September. Prime Minister Benjamin Netanyahu, seen today as one of the most popular politicians in the country, was a vocal backer of the idea. Worried that the right wing parties in his coalition were beginning to splinter over the divisive issue of military service for religious students, early elections would likely have reaffirmed Netanyahu’s domestic support and consolidated his power.

But in a last minute change of heart, Netanyahu managed to strike a comprehensive deal to avert early elections entirely.

After painstaking negotiations in the middle of the night, Netanyahu emerged from the room to address the Israeli press with his newfound political ally, former army chief of staff and defense minister Shaul Mofaz—who just weeks ago pledged to use his recent victory in the Kadima party as a counterweight to the prime minister.

Mofaz will be awarded a deputy prime ministerial position in exchange for rolling his party into Netanyahu’s coalition government. The final result: Netanyahu is now leading the widest coalition in Israeli political history, with ninety-four seats in the 120 member Knesset under his leadership.

From afar, it is tempting to simply chalk Netanyahu’s latest political coup as an attempt to grab more support inside Israel’s political system. Indeed, with his coalition now expanded, this was undoubtedly a major variable in his calculations. Netanyahu is a shrewd political operator who has learned from the mistakes he made during his previous tenure as prime minister in the 1990s.

Further from the surface, the Netanyahu-Mofaz agreement could very well be something entirely different—a bid to dilute the power of the religious parties on which Netanyahu depended to maintain power.

For the past three years, the conservative leader has been cast by his enemies in Israel and some in the United States as a significant impediment to a peace deal with the Palestinians. This is not an unreasonable view. It took Netanyahu decades to endorse the conventional two state solution. He refused to stop settlement building in the occupied West Bank—a Palestinian precondition for peace talks. The only time Netanyahu and Palestinian leader Mahmoud Abbas met directly was during a brief summit in September 2010, which quickly collapsed over the Israeli prime minister’s refusal to extend a temporary Jewish settlement freeze.

As long as his governing coalition relied on religiously oriented parties, including foreign minister Avigdor Lieberman’s nationalist Yisrael Beitenu, the ultraorthodox Shas and pro-settler factions of Likud, Netanyahu always had a reason (or excuse) not to offer the Palestinians any concessions. An additional settlement freeze or symbolic speeches supporting eventual Palestinian independence would have rankled Netanyahu’s right wing base, compromising the very structure of his government.

By bringing in centrist lawmakers, the influence of fringe parties will be thinned out, providing Netanyahu the potential breathing space he needs to negotiate with the Palestinians on matters such as settlement construction, security cooperation and further withdrawals of Israeli defense forces from the West Bank.

It remains to be seen whether Netanyahu will indeed exploit his new coalition to make difficult but necessary decisions on the peace process, including the termination of all settlement activity on land that the Palestinians need for a future state of their own. If not, he will have spoiled an opportunity to use his political capital for the benefit of the peace process—one that is slowly but surely on life support as the settler population in the West Bank continues to expand.

European Commissioner for Economic and Financial Affairs Olli Rehn, January 10 (ALDEADLE)

Both Europe’s top economic official and German chancellor Angela Merkel warned eurozone governments this week against further borrowing to pay for stimulus measures.

“We cannot solve this crisis by piling new debt on top of old debt which is already damaging our economic growth prospects,” Olli Rehn, Europe’s commissioner for economic and monetary affairs, said in panel presentation at a conference in Tallinn, the capital of Estonia which adopted the common currency in January of this year.

Merkel told the Hamburger Abendblatt earlier in the week that Europe had to “get away from the idea that it always costs money to get economic growth.”

She reiterated that sentiment in parliament in Thursday. “Growth through structural reforms is sensible, important and necessary,” according to Merkel.

Growth on credit would just push us right back to the beginning of the crisis and that is why we should not and will not do it.

The German leader suffered a setback the next day when the left wing majority in the upper chamber of parliament rejected her plan to reduce income taxes by €6 billion next year.

The ruling German conservative and liberal parties have not had a majority in the Bundesrat since May 2010. Socialist and Green parties in opposition are increasingly critical of their austerity agenda. Social Democratic Party leader Frank-Walter Steinmeier urged the government two months ago to enact “additional measures to promote economic growth.” His party has been emboldened by socialist François Hollande’s election win in France.

Merkel’s and Rehn’s warnings were clearly aimed at preempting the newly elected French president’s push for a growth pact that would enable national governments to spend more freely to stimulate economic activity. Hollande has been critical of the strict fiscal rules that were enshrined in a European treaty in December.

Eurozone governments have now to submit their spending plans to the European Commission for approval. If they fail to adhere to the deficit cap of 3 percent of gross domestic product, the Commission drafts an alternative budget. Countries that do not implement it could be subject to a fine.

Rehn, whose department is the recipient of governments’ budget proposals, insisted that Europe stays the course. He added, “we are suffering from a very high level of public debt which has increased from 60 percent on average to 90 percent in Europe.” Particularly in the periphery of the single currency area, countries have racked up enormous debts.

“The only sustainable path,” said Merkel, “is to accept that getting over the crisis is a long, strenuous process which will only succeed if we tackle the causes of the crisis which are the horrendous debt and the lack of competitiveness of some eurozone states.”

In conjunction with debt and deficit limits, the Germans have sought to enhance competitiveness across the eurozone with lower taxes, liberalizations and labor market reforms.

Greece, Italy and Spain have made progress in these areas but say that they need more time for fiscal consolidation and more flexibility on the part of the European Central Bank to finance their deficit spending before they’re able to balance their budgets. The Germans are highly critical of this proposition because it would drive up inflation.