European leaders desperately want to end their debt crisis. 2½ years in, they're still searching for solutions
WASHINGTON (AP) — On paper at least, European leaders agree: They need stronger growth measures to help their economies expand out of their 2½-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 €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.”
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.
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 task force to restructure troubled banks along the lines of the one 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.”
More Related Stories
- House supporters of KXL received $56m from fossil fuel industry
- 80-year-old becomes oldest to climb Mount Everest
- Before FBI shooting man implicated self, Tsarnaev in triple murder
- Paul McCartney backs Pussy Riot
- UK emergency committee convenes after attack
- Brave scout leader tried to reason with London attackers
- If Alex Pareene were a cable news executive...
- El Salvador court delays ruling on abortion case while woman's life hangs in the balance
- UK officials: Radical Islam behind London attack
- Pa. governor "can't find" any Latinos to work in his administration
- London machete attack could be linked to terrorism
- Conservative group blames military sexual assault on "Don't Ask, Don't Tell" repeal
- Lois Lerner, IRS disaster
- Donald Rumsfeld worried that marriage equality will lead to polygamy
- Experts: Fox News spying scandal a game-changer
- San Francisco Giant Jeremy Affeldt apologizes for homophobic past
- 9-year-old slams Rahm over Chicago schools
- Stockholm riots rage for third day
- Wall Street firm's "Golden Pitchbook" is totally sexist, full of lies
- Must-see morning clip: Toronto's eccentric and allegedly crack-smoking mayor
- Federal court strikes down Arizona abortion ban
Featured Slide Shows
The week in 10 picsclose X
- 1 of 11
Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
Credit: AP/LM Otero
Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
Credit: AP/Matt Rourke
A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
Credit: AP/Jenny Aicher
Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
Credit: AP/Molly Riley
Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
Credit: AP/J. Scott Applewhite
Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
Credit: AP/Carolyn Kaster
O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
Credit: AP/Las Vegas Review-Journal/Jeff Scheid
Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
Credit: AP/NASA/Chris Hadfield
When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
Credit: AP/Jacquelyn Martin
A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
Credit: AP/The Duluth News-Tribune/Clint Austin
Recent Slide Shows
- 1 of 11