BERLIN (AP) — The German and French leaders stressed Monday that boosting economic growth in the 17-nation eurozone is a priority, a recognition that the focus on austerity cuts is unlikely to get Europe out of its debt crisis.
Some analysts fear excessive austerity measures will take a heavy toll on weakening economic growth and push the eurozone into recession this year, in turn hindering the region's deficit-cutting efforts.
Germany has so far been the biggest proponent of debt reduction as the key for financially weak countries to regain investor confidence. On Monday, however, Chancellor Angela Merkel acknowledged that austerity alone cannot resolve everything.
"Budget consolidation is one of the legs Europe's future must be built on, but of course we need a second leg and that is ... the question of economic growth, jobs and employment," she told reporters alongside President Nicolas Sarkozy.
They proposed that Europe compare countries' labor market practices and learn from the best, and that already available European funding be used to support small and medium-sized companies and projects such as expanding broadband Internet networks.
They said they would consider speeding up payments into the eurozone's permanent rescue fund, which is to start work this summer. They also urged a quick conclusion to negotiations among most European Union members on a new treaty meant to enshrine tougher fiscal discipline as well as talks on restructuring Greece's debt.
The eurozone has been shaken over the past two years by worries over too much debt — first in relatively small economies like Greece, Ireland and Portugal, which needed bailouts and now in larger countries like Italy.
Sarkozy acknowledged the gravity of Europe's situation as the crisis enters its third year.
"The situation is tense, perhaps more so than ever in the eurozone's history," he said. Growth, he insisted, is "the priority today."
Still, there was no sign of a significant shift in direction. Merkel insisted that resolving the crisis will be a "step-by-step" process with no single spectacular solution.
"EU leaders have to understand that mere lip-service to growth will not induce growth in the eurozone," said analyst Sony Kapoor, managing director of Re-Define, a London-based think tank.
"Many of the more troubled economies are at serious risk of their debt snowballing out of control under excessive austerity," he added.
Europe is now working to hammer out a new treaty enshrining tougher fiscal rules, which leaders agreed at a summit in early December. Merkel said negotiations "are progressing well," that the pact could be signed as early as the end of this month, and at the beginning of March at the latest.
In the meantime, Greece's difficulties again loom large.
Greece, whose debt problems sparked the crisis, is struggling to impose austerity measures to be eligible for a second, euro130 billion ($165 billion) bailout meant to ensure its doesn't default on its debt and remains in the eurozone.
Greece is also working to strike a deal with creditors for a 50 percent reduction in the face value of their Greek bonds to try to lighten the country's debt load.
The negotiations on the details of the debt restructuring have dragged on amid disagreements over how much of a hit banks and other private investors should take.
Frank Vogl, a spokesman for the Institute of International Finance, which has been leading the talks for the bondholders, on Monday rejected recent press reports that negotiations are now considering a face value cut of more than 50 percent.
"From our point of view, the second Greek program, including the debt restructuring, must now be realized quickly," Merkel said. "Otherwise, it will not be possible to pay out the next installment for Greece — but we want that (payment) and we want Greece to remain in the eurozone."
She insisted that "Greece remains a special case."
Eurozone leaders want to have their permanent rescue fund, the European Stability Mechanism, up and running in July — a year ahead of the original schedule. It will be able to lend euro500 billion ($636 billion); euro80 billion of its funding will be in the form of paid-in capital from euro nations, which current plans say should be paid in over time in five installments.
"Germany and France are prepared, in consultation with other countries of course, to examine to what extent we could in some way speed up the capital payments and so once again make our confidence in and support for the eurozone clearly visible," Merkel said.
Both leaders seek a tax on financial transactions in the 27-nation EU. But while Sarkozy, facing an election in April, was keen for France to push ahead and create "movement in the eurozone," Germany was more guarded.
Merkel said she personally could envision such a tax at the eurozone level, but noted that there's no agreement yet on that inside her own governing coalition. She called for clarity by March on how Europe proceeds.
The meeting came ahead of new Italian Premier Mario Monti's first visit to Berlin Wednesday. Ahead of that, Merkel plans an informal meeting Tuesday evening with International Monetary Fund chief Christine Lagarde.
Merkel and Sarkozy will travel to Italy on Jan. 20 before a European summit at the end of the month.
Italy is a key focus because of its size, huge debt load and need to borrow heavily in the first quarter. The yield on its 10-year bonds is hovering around the 7 percent level that is widely-considered to be a danger mark.
Germany's reputation as a safe haven from the sovereign debt crisis was bolstered on Monday with the sale of 3.9 billion euros of six-month treasury bills at a yield of minus 0.0122 percent.
"This is extraordinary," said Louise Cooper, markets analyst at BGC Partners. "Investors are willing to get slightly less money back in six months than they pay now, just for the perceived safety of Germany."
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Gabriele Steinhauser in Brussels contributed to this report.
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