"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.

Mrs Merkel swept aside criticisms that Germany and other surplus countries are partly to blame for the widening North-South rift that has led to Euroland’s worst crisis since the launch of monetary union.

"The problem has to be solved from the Greek side, and everything has to be oriented in that direction rather than thinking of hasty help that does not achieve anything in the long run and merely weakens the euro even more," she said.

Instead she called for EU treaty chnges so that serial violators of EMU rules could be expelled from the euro, and insisted Germany would stick to its own path of hairshirt austerity.

The tough words came as the IMF’s chief Dominique Strauss-Kahn said it was time for Berlin to rethink its single-minded pursuit of exports, warning that both Germany and China need to play their part in rebalancing the global system rather than relying on huge structural surpluses. "This must change. Internal demand must be strengthened with more consumption," he told the European Parliament.

French finance minister Christine Lagarde infuriated Berlin earlier this week by suggesting that Germany’s relentlesss wage squeeze was making it impossible for Club Med states to claw back lost competitiveness within monetary union, forcing them into a deflation policy that must ultimately rebound against everybody.

"Clearly Germany has done an awfully good job in the last 10 years or so improving competitiveness. When you look at unit labour costs, 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. While we need to make an effort, it takes two to tango," she told the Financial Times. Mrs Lagarde said yesterday that Germany should cut consumption tax to lift imports and help do its part to narrow the North-South gap.

Her comments have prompted fierce criticisms in Germany. "Mrs Lagarde must take back her outrageous assertions: jealousy should not be a factor in the politics of European neighbours. This is the behaviour of a bad loser," said Alexander Dobrindt, general secretary of Bavaria’s Social Christians (CSU) in the Merkel coalition.

Germany has gained some 30pc to 40pc in cost advantage against Italy and Spain since the mid 1990s, and over 20pc against France, according to EU data. Germany’s current account surplus is expected to reach $190bn this year, or 6pc on GDP.

The achievement is remarkable, but is also upsetting the structure of monetary union. David Marsh, author of `The Euro: the Politics of the New Global Currency", said the Germans never faced up to the political implications of EMU. "They thought everybody else should become more German. You can’t blame them for having a desire for a competitive industry and surpluses built into their genes, but they are not thinking holistically," he said.

EMU rules are forcing Club Med states to tighten fiscal policy by 10pc of GDP for Greece, 8pc for Spain, and 6pc for Portugal over three years without any offsetting monetary or exchange stimulus, an unprecedented demand that may cause such deep economic damage that it proves self-defeating in the end.

Charles Dumas from Lombard Street Research said the Club Med states and Ireland cannot deflate wages below German levels without causing havoc to their economies, so the EU policy creates a profound bias towards a deflationary slump for the whole system.

"The Germans are not very good at arithmetic. If they want to run surpluses near $200bn (£130bn), others must run deficits near $200bn. It is not appropriate that Germany’s dismal growth peformance be exported to the whole of Europe, but that is what is going to happen," he said.

"There has been this massive self-righteousness in Germany. They have been leeching off the demand of countries for the last decade, and now they too are going to suffer until they change their ways. German industrial production is down 17pc from the peak and has been flat for four months, so Mittelstand bosses are soon going to draw the obvious conclusion and downsize in style," he said.

Mr Dumas said the trade surplus of the German bloc of Northern states is as great as the combined surplus of China and Asia’s tigers. They are central players in the story of global imbalances.

Holger Schmieding, chief Europe economist at Bank of America Merrill Lynch, said attacks on Germany were deeply misguided. The country suffered a long slump after digesting East Germany in the 1990s and was forced to retrench. It did not take part in the global credit boom, acting as a counterweight to excess. Once the bust began it had sufficient fiscal reserves to cushion the shock with large stimulus measures, again acting as a bullwark of stability.

"I am still waiting hear the world say `thank you Germany’," he said.

By Ambrose Evans-Pritchard

Source >  Telegraph