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Europe faces difficult search for growth

Monday - 5/21/2012, 12:06am  ET

AP Business Writer

WASHINGTON (AP) - On paper at least, European leaders agree: They need stronger growth measures to help their economies expand out of their 2 1/2-year-old government debt crisis. Figuring out exactly what those new steps might be will be the hard part.

Persistent political divisions _ neatly bridged by a Group of Eight summit statement that advocates a mix of austerity and growth promotion _ and lack of money stand in the way of a comprehensive European growth strategy. Analysts said markets were likely to look past the verbal deal, with news about Greece's struggle to stay in the eurozone and an informal European Union summit Thursday in Brussels more likely to set the tone.

At Saturday's G-8 summit, German Chancellor Angela Merkel _ under urging from U.S. President Barack Obama and French President Francois Hollande _ 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 longer-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. A new government that rejects the austerity required under bankrupt Greece's (EURO)130 billion bailout from other eurozone countries could lead to it leaving the euro and spreading financial chaos.

Cornell University economist Eswar Prasad said the statement splits the difference among the leaders' positions 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."

"Market expectations for the summit were quite low and those expectations have been met," he said. "I don't think this is going to make much difference for markets."

Asian stock markets struggled to make headway early Monday, as investors _ already nervous about slowing growth in China and fears that turmoil in Europe could hit key export industries _ saw little tangible progress stemming from the summit.

"Although G8 leaders made plenty of noises about combating the crisis and shifting focus towards growth, there was as usual little concrete news in terms of how they would do this," said analysts at Credit Agricole CIB in Hong Kong.

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 backs 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?

In their summit fudge, European leaders were in effect recognizing limited steps that are already taking place in a modest and informal growth program. 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.

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