- The Washington Times - Sunday, May 27, 2012

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

The Organization for Economic Cooperation and Development has 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 being a drag on the global economy.

The electoral turmoil in Greece threatens to pull apart the eurozone. Borrowing costs are up for the most indebted governments. There are more reports of worried savers and investors pulling funds out of banks that are seen as weak.

Unemployment is also 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 will be even harder.

On the agenda

For the past few years, fiscal austerity was all anyone ever talked about in Europe. That had a certain logic since governments were facing rising borrowing costs on bond markets, a sign investors are nervous about the size of their ballooning deficits. Austerity was intended to address this nervousness by reducing a government’s borrowing needs.

For the people of Europe, austerity meant layoffs and pay cuts for state workers, scaled-back spending on welfare and social programs, and higher taxes and fees to boost government revenue.

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 austerity has dragged down already fragile economies, and, as economic output shrinks, the debt burden looks worse.

As a way out of this problem, economists and politicians have called for measures that would help a country’s economy grow.

France’s new 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.

Promoting growth

Leaders at Wednesday’s summit are expected to tread a fine line between talking about ways to promote growth and sticking to commitments to balance budgets.

So where will the money to boost growth come from? One area could be the better use of the resources already at the European Union’s disposal.

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 also are 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 already have agreed to issue EU “project bonds” - debt issued jointly by the union - that 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. However, only a pilot phase of the project has been approved.

Disagreements ahead

Project bonds are seen by many politicians and economists as a step toward so-called “eurobonds” - jointly issued bonds that could be used to fund anything and could eventually replace an individual country’s debt.

Eurobonds would protect weaker countries, like Spain and Italy, by insulating them from the high interest rates they now face when they raise money on bond markets. Those high interest rates are ground zero of the crisis: They forced Greece, Ireland and Portugal to seek bailouts.

EU President Herman Van Rompuy has encouraged participants on Wednesday to discuss “innovative, or even controversial, ideas.” He has suggested that nothing should be taboo and that long-term solutions should be looked at.

But Germany staunchly opposes such a measure. Last Tuesday, a senior German official stressed that despite the pressure from some other European countries, Mrs. Merkel’s government has not eased its opposition.

What is needed instead, the official insisted, is work to eliminate the underlying problems by trimming the nations’ high debt burden and restoring their competitiveness through structural reforms.

Too much debt, too little time

The problem with many of the solutions is that they would likely take years to yield growth. And Europe needs faster answers.

To that end, many economists are pushing for a larger role for the European Central Bank (ECB) - the only institution powerful enough to have an immediate impact on the crisis.

If Europe’s central monetary authority were given the power to buy up a country’s bonds, that government’s borrowing rates would be pushed down to more manageable levels.

“In the immediate future, the ECB will remain the only institution with the resources, speed of action, and policy instruments necessary to shore up confidence in the single currency area, a role we expect it will play, should conditions necessitate,” a Eurasia Group note said Tuesday.

Another problem is that a surge in popularity of anti-bailout parties in Greece may force European leaders to reconsider their commitment to austerity very quickly.

Expectations are that a new Greek government after June 17 elections could seek to renege on the country’s austerity program. Greece’s bailout creditors in the eurozone would then have to decide whether they are willing to ease austerity to favor growth. If they do not and cut Greece off from aid, the country would default and likely have to leave the euro.

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