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Europe's leaders seek ways to boost growth

By Sarah Dilorenzo

Associated Press

Published: Wednesday, May 23 2012 8:05 a.m. MDT

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

On Tuesday the Organization for Economic Cooperation and Development 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 dragging down the global economy.

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

WHAT'S 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 Germany's Chancellor Angela Merkel — proposed a so-called "fiscal pact" that would tie member countries to strict fiscal and deficit targets.

But, as many economists had predicted, austerity has dragged down already fragile economies and, as economic output shrinks, the debt burden actually 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.

Economists recommend pro-growth measures including reducing red tape for small businesses, making it easier for workers to find jobs across the eurozone and breaking down barriers that countries have created to protect their own industries. Some economists go a step further and say governments should actually increase spending while economies are so weak — and make reining in deficits a longer-term goal

However the question of how to produce growth for Europe is a sticky one. Germany, which led the push for austerity, insists that growth will be the product of tough reforms, like ones it undertook to liberalize its economy over a decade ago. Others say such reforms will take a while to bear fruit and more needs to be done right now — such as extending the deadline for deficit targets and waving through wage increases.

HOW DO YOU PROMOTE GROWTH?

Leaders at Wednesday's summit — like the heads of the world's leading economies at the G-8 meeting at Camp David last weekend — are expected to tread a fine line between talking about ways to promote growth and sticking to commitments to balancing 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 are also expected to discuss increasing the size of the European Investment Bank so that it can, in turn, lend more money to struggling small businesses.

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