ANGELA MERKEL launched a stubborn defence of the European Union’s catastrophic austerity drive today despite growing evidence that it is preventing economic growth.

The 18-nation eurozone’s economy did not grow at all in the second quarter — while Germany itself recorded a 0.2 per cent contraction.

Stock markets fell as data on manufacturing in key EU economies including Germany and Britain proved disappointing.

Ms Merkel’s refusal to change course followed demands from IMF chief economist Olivier Blanchard and even former US Treasury secretary Larry Summers for Europe to invest in growth.

Mr Summers told the annual World Bank-IMF meeting last weekend that “what’s happening in Europe is not working. What followed in Japan was 15 years of deflation and dismal economic performance. That is the path that Europe is on.”

But the German chancellor insisted that countries should stick rigidly to her prescription of spending cuts because Europe was “still too fragile for us to go back to business as usual.

“All, and I stress again, all member states must respect in full the rules of the strengthened stability and growth pact,” she pontificated, referring to the arbitrary 3 per cent cap on budget deficits aimed at forcing governments to slash social security.

Her speech to the German parliament was seen as a challenge to France, which has acknowledged that despite budget cuts it will not get its deficit below 3 per cent of GDP in 2015.

She resisted calls from across the continent for public investment to stimulate economic growth, vowing not to borrow extra next year or raise taxes.

“It is business and companies that create jobs and innovation — so if we want growth in Europe this must above all be about mobilising private capital,” she said.

She echoed the British Tory myth that public spending rather than reckless financial speculation caused the economic crash, claiming that “the crisis has not been permanently overcome because the causes regarding the situation of individual member states have not been eliminated.”