Europe faces difficult search for growth

French Pres­i­dent Fran­cois Hol­lande, left, talks with Ger­man Chan­cel­lor Angela Merkel at the North Atlantic Coun­cil meet­ing in Chicago dur­ing the NATO 2012 Sum­mit, Sun­day. French Defense Min­is­ter Jean-Yves Le Drian is at back cen­ter. (AP Photo/Christophe Ena)

DAVID McHUGH

AP Busi­ness Writer

WASHINGTON — On paper at least, Euro­pean lead­ers agree: They need stronger growth mea­sures to help their economies expand out of their 2 ½-year-old gov­ern­ment debt cri­sis. Fig­ur­ing out exactly what those new steps might be will be the hard part.

Under urg­ing from U.S. Pres­i­dent Barack Obama and French Pres­i­dent Fran­coise Hol­lande at the Group of Eight sum­mit, Ger­man Chan­cel­lor Angela Merkel signed onto a state­ment that called for mix­ing painful cut­backs with growth-promoting mea­sures to deal with a cri­sis that threat­ens the global economy.

The lead­ers warned that bud­get deficits have to come down. But they also acknowl­edged that an approach that’s based mostly on aus­ter­ity and long-term reforms can’t help coun­tries out of reces­sions this year or next. That’s the approach that has dom­i­nated the continent’s German-led attack on the cri­sis since it erupted in late 2009, when Greece admit­ted its finances were broken.

“Our imper­a­tive is to pro­mote growth and jobs,” lead­ers said in their final dec­la­ra­tion after Saturday’s sum­mit. While they “com­mit to fis­cal respon­si­bil­ity,” the lead­ers also sup­ported spend­ing on edu­ca­tion and pub­lic works. They also said heav­ily indebted coun­tries should have the chance to fix their bud­gets in ways that take into account how well their economies are doing at the moment and sup­port “con­fi­dence and eco­nomic recovery.”

They said lit­tle about spe­cific steps and left exactly what to do up to indi­vid­ual coun­tries, say­ing they rec­og­nize “the right mea­sures are not the same for all of us.”

The state­ment comes as mar­kets look ahead to an infor­mal Euro­pean sum­mit meet­ing Thurs­day, and to a June 17 elec­tion in Greece. An inde­ci­sive poll May 6 left no Greek party with enough votes to govern.

Cor­nell Uni­ver­sity econ­o­mist Eswar Prasad said the state­ment papers over divi­sions among the lead­ers and said Merkel, a chief advo­cate of aus­ter­ity, had not altered her stance. The lan­guage “is cau­tious and guarded and leaves much room for dif­fer­ence of opin­ion so that each of the G-8 lead­ers can go back and say they got the other lead­ers to agree.”

“There is no con­sen­sus there and it comes across very clearly in the state­ment,” he said. “Mar­ket expec­ta­tions for the sum­mit were quite low and those expec­ta­tions have been met.”

At the sum­mit, Merkel openly rejected any sense that a pro-growth stance meant stim­u­lus spend­ing. It’s a stance fed by annoy­ance among vot­ers at home that Ger­many, which sup­ports the biggest share of the Euro­pean bailout fund, is help­ing res­cue coun­tries that were not care­ful with their finances. Ger­many faces national elec­tions next year.

So where will growth come from?

Despite their fudg­ing, Euro­pean lead­ers were in effect rec­og­niz­ing lim­ited steps that are already tak­ing place. It’s clear that the slack econ­omy in Spain, for instance, means the coun­try will not reach its tar­get deficit of 3 per­cent of gross domes­tic prod­uct by next year, in effect tak­ing more time to meet EU bud­get rules.

The slip­ping tar­get under­lines the aus­ter­ity trap: To keep bor­row­ing money by sell­ing bonds to investors, Spain must show it is reduc­ing its deficit, which was 8.9 per­cent of GDP last year. So it is severely cut­ting back spend­ing. That removes stim­u­lus from the econ­omy. Partly as a result, the econ­omy sank into reces­sion. And as com­pa­nies and peo­ple make less money, they pay less in taxes. The cut­backs make bal­anc­ing the bud­get even harder.

In addi­tion to let­ting deficit tar­gets slip, Euro­pean offi­cials have talked about adding money to the Euro­pean Invest­ment Bank, a devel­op­ment bank that loans money for pub­lic projects, and find­ing ways to make quicker use of unspent EU aid funds that are typ­i­cally used for things like roads, water treat­ment plants and ports to help poorer EU mem­bers catch up.

Prasad said such spend­ing of EU funds could be “poten­tially use­ful if they can be pack­aged in a way that is polit­i­cally accept­able in Germany.”

Another trend hap­pen­ing in the back­ground is larger wage set­tle­ments in Ger­many. Ger­many dom­i­nates as an exporter because it kept labor costs down with reforms in 2004. Some think less restraint on pay could boost con­sump­tion and spend­ing on imports at home and even out trade imbal­ances within the euro­zone. The top indus­trial union, IG Met­all, won a deal for a 4.3 per­cent raise over 13 months in a key region in south­west­ern Ger­many over the weekend.

It’s a trend that offi­cials can bless, but it doesn’t require action on their part.

Yet econ­o­mists say that emerg­ing mea­sures such as slower deficit reduc­tion and more EU infra­struc­ture spend­ing, while help­ful, will not enough. Not enough money is involved.

A bolder growth strat­egy could include move­ment toward some form of group bor­row­ing among all 17 euro­zone coun­tries to pay for pub­lic works projects, said Marc Ost­wald, strate­gist at Mon­u­ment Secu­ri­ties in Lon­don. That could be a pre­lude to eurobonds — col­lec­tive bor­row­ing and cen­tral con­trol of bud­get spend­ing. “The thing they absolutely have to decide is how they’re going to move toward fis­cal union,” said Ost­wald. “Ger­many may not want eurobonds right now, but there are going to be eurobonds.”

Ost­wald and other econ­o­mists say deal­ing with Europe’s bank­ing sys­tem, on shaky ground for sev­eral years, would be one of the strongest mea­sures Europe could take now.

An EU-wide guar­an­tee for bank deposits could shore up depos­i­tors’ con­fi­dence their money is safe no mat­ter what hap­pens at the national level. An EU-wide bank­ing reg­u­la­tor with the power to force banks to restruc­ture would improve the flow of credit and boost con­fi­dence. Europe’s shakier banks are heav­ily depen­dent on emer­gency credit from the Euro­pean Cen­tral Bank, a sit­u­a­tion that has per­sisted for sev­eral years, start­ing with the onset of the global finan­cial crisis.

“We have had a dam­aged finan­cial sys­tem since 2007 and 2008 but it has never been addressed,” said Nico­las Veron, senior fel­low at eco­nomic think tank Bruegel in Brus­sels. He advo­cates a multi­na­tional task force to restruc­ture trou­bled banks along the lines of the task force that led a restruc­tur­ing of the U.S. auto­mo­bile indus­try, in which Gen­eral Motors and Chrysler shed debt and reshaped their busi­nesses under bank­ruptcy court protection.

“As long as we have a sick finan­cial sys­tem, it will be very tough to get invest­ment and con­sump­tion back to lev­els com­pat­i­ble with robust growth in the euro­zone,” Veron said.

Yet all those more deci­sive solu­tions face obsta­cles. Ger­many is against col­lec­tive bor­row­ing to help more indebted coun­tries, fear­ing it will pay the freight as the biggest euro­zone mem­ber. National gov­ern­ments are reluc­tant to give up con­trol over banks, want­ing to pro­mote their own finan­cial indus­tries. Let­ting coun­tries slow down deficit reduc­tion will only roil mar­kets unless it is seen as part of a gen­uine effort to fix finances in the long term.

“There is no mir­a­cle,” said Veron. “It is going to be a long hard slog in the best of scenarios.”

Posted by AP News on May 20 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.