Merkel, Sarkozy stress growth a priority in crisis

By Geir Moulson

Associated Press

Published: Monday, Jan. 9 2012 9:35 a.m. MST

German Chancellor Angela Merkel, right, French President Nicolas Sarkozy brief the media after talks about the Euro debt crisis at the chancellery in Berlin, Monday, Jan. 9, 2012. The French and German leaders are stressing that they view boosting economic growth a priority as they push through with efforts to stem the eurozone's debt crisis.

Markus Schreiber, Associated Press

BERLIN — 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, €130 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.

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