-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --
By Paul Taylor
PARIS, Oct 19 (Reuters) - The 16 countries that share the euro currency are stumbling towards a disorderly exit from the financial crisis that could have high costs for the European economy, despite vows to coordinate their policies.
Euro zone governments know they will soon have to start reducing huge deficits and public debt incurred to rescue banks, absorb the social cost of recession and stimulate growth. Otherwise, the European Central Bank will feel obliged to raise interest rates faster and further, crimping economic recovery.
The Bruegel think-tank, in a study for EU finance ministers this month, set out a sequence of steps for a smooth exit: first recapitalise and restructure the banks, then start cutting budget deficits and only then tighten monetary policy.
"For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli," the study by economists Juergen von Hagen, Jean Pisani-Ferry and Jakob von Weizsaecker said.
But while Germany's new centre-right coalition is preparing to restore fiscal discipline from next year, France's public finances are still heading over a cliff. Italy, Spain, Greece and Ireland all face an alarming rise in their debt levels.
French President Nicolas Sarkozy's government has just announced a 2010 budget with a record deficit of 8.5 percent of gross domestic product. On top of that, Sarkozy plans to issue a big public savings bond to fund hi-tech industrial projects.
On the banking clean-up, France is ahead of the Germans. French banks have repaid or will soon repay all the emergency funds they received from the state last year, while most German banks have yet to dispose of tens of billions of euros in toxic assets or undergo recapitalisation and drastic restructuring. Berlin has so far baulked at making the taxpayer share the cost.
EU Monetary Affairs Commissioner Joaquin Almunia said in a frank report this month that euro zone countries had suffered more than necessary in the crisis because they failed to address deep-seated economic imbalances during the good times.
Countries such as Germany with excessive current account surpluses had failed to stimulate domestic demand, and their unbalanced economic strategy had caused problems for the whole euro area, the report said.
The Germans kept wage costs down for a decade and exported far more to other European countries than they imported.
Other states, such as France, failed to consolidate their budgets during the good times and entered the crisis with a high structural deficit of three percent of GDP, the report said.
"Euro zone countries have behaved as if they hadn't been sharing a common currency for the last 10 years. It's still each for himself," said an aide to Almunia, summing up the message of the report.
Well, here they go again.
In a more balanced euro zone, the Germans would boost consumer spending while the French would reduce their deficit.
But instead, Germany is looking to export its way out of crisis at the expense of European partners, focusing tax cuts on industry rather than stimulating domestic demand that would suck in imports from other euro zone countries.
The outgoing Berlin government pushed a budget-balancing constitutional amendment through parliament without consulting its partners. The likely German policy mix will make it harder for peripheral euro zone states to recover lost competitiveness.
France, with a presidential election in 2012, is looking to delay the awful moment when it has to start cutting its deficit.
EU ministers were unable to agree this month on 2011 as the date to withdraw fiscal stimulus measures and begin deficit cuts. The French insisted each country should set its own timetable.
True, Sarkozy has made some unpopular structural reforms such as the non-replacement of one out of every two retiring civil servants. But all the savings achieved were wiped out by the cost of cutting value added tax on restaurants -- a populist measure that has not been fully passed on to consumers.
Central bankers expect the fiscal rift between Germany and France to lead to widening spreads between the borrowing costs of the two biggest countries in the currency area, with bigger risk premiums for other highly indebted euro area sovereigns.
ECB governing council member Christian Noyer, governor of the Bank of France, warned last week that long term interest rates would rise if euro zone countries do not get their deficits under control. That in turn would raise the cost of debt service and reduce economic growth.
Euro zone governments have a choice between hanging together and hanging separately. The latter looks more likely for now. (Editing by David Evans)