- Associated Press - Tuesday, May 22, 2012

PARIS — The leaders of the 27 countries that make up the European Union meet in Brussels on Wednesday to try and find a way to keep the debt crisis in Europe from spiraling out of control and to promote jobs and growth.

On Tuesday, the Organization for Economic Cooperation and Development warned that the 17 countries that use the euro risk falling into a “severe recession.” It called on governments and Europe’s central bank to act quickly to keep the slowdown from dragging down the global economy.

The electoral turmoil in Greece threatens to pull apart the eurozone. Borrowing costs are up for the most indebted governments, including Spain and Italy. There is an increasing number of reports of worried savers and investors pulling funds out of banks that are seen as weak. Meanwhile, unemployment is soaring as recession grips nearly half the eurozone countries.

However, switching the conversation from slashing budgets to promoting growth won’t be easy. And actually producing growth - amid signs of a political backlash against austerity policies — will be even harder.

At the height of the debt crisis last winter, the eurozone — led by German Chancellor Angela Merkel — proposed a so-called “fiscal pact” that would tie member countries to strict fiscal and deficit targets.

But, as many economists had predicted, austerity has dragged down already fragile economies and, as economic output shrinks, the debt burden actually looks worse.

As a way out of this problem, economists and politicians have called for measures that would promote short-term growth. New French Socialist President Francois Hollande has led the charge, insisting during his campaign that he would not sign Europe’s fiscal pact until it includes measures to promote growth.

Leaders at Wednesday’s summit in Brussels — like the heads of the world’s leading economies at the Group of Eight meeting at Camp David last weekend — are expected to tread a fine line between talking about ways to promote growth and sticking to commitments to balancing budgets.

The EU has a pot of so-called “structural funds,” many of which are going unused even though several countries are in desperate need of cash. Putting those to use will be one topic Wednesday. Countries are also expected to discuss increasing the size of the European Investment Bank so that it can, in turn, lend more money to struggling small businesses.

Diplomats have already agreed to issue EU “project bonds” — debt issued jointly by the union — which can be used to fund major infrastructure projects. Mr. Hollande campaigned strongly on this idea, and even Germany, which was initially opposed to any jointly held debt, has softened its position.

EU President Herman Van Rompuy has encouraged participants on Wednesday to discuss “innovative, or even controversial, ideas” as countries such as Greece, Italy and Ireland face desperate fiscal straits. He has suggested that nothing should be taboo and that long-term solutions should be looked at.

But Germany is still staunchly opposed to measures such as issuing so-called “eurobonds.” On Tuesday, a senior German official stressed that despite the pressure from some other European countries, Mrs. Merkel’s government has not eased its opposition.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide