France, Germany divided on growth as E.U. summit begins in Brussels

May 23, 2012

European leaders expressed determination to keep Greece in the euro zone early Thursday after a summit meeting and said that, despite a deep divide between France and Germany, they would seek a new European Union “growth pact” designed to stimulate their sagging economies.

The decision to urge Greece to remain among the 17 nations using the E.U.’s common currency despite an economic implosion appeared designed to counter reports that preparations are already underway for the country’s exit from the system. The reports contributed to a generalized drop in European stock markets in Wednesday’s trading.

But the vow to keep Greece in the euro system was coupled with a demand that the Greek government, however it is constituted after elections June 17, carry out budget-cutting and other reform obligations undertaken in return for a massive bailout. “We expect that after the elections, the new Greek government will make that choice,” the E.U. leaders said in a communique.

While the leaders were unanimous in a desire to eke more growth out of their anemic economies, efforts to agree on the growth pact were stymied by disagreement over the best way to reach the goal. The clashing views endangered prospects for effective stimulus at a time when the euro-zone economy is falling into recession and growth stands at just slightly over zero in the entire 27-nation European Union.

Prolonging the continent’s slowdown could also undermine the beginnings of recovery in the United States, dampening exchanges across the globe’s increasingly integrated economy.

President Francois Hollande of France, reporting on a six-hour dinner discussion that ended in the early-morning hours, said most leaders supported modest steps such as “project bonds,” or E.U.-backed loans for specific investments, and increasing the lending power of the European Investment Bank. But he said Germany and other countries refused to go along with his suggestion for broader eurobonds, debt that would be backed by E.U. governments in solidarity with near-bankrupt countries whose borrowing has become prohibitively expensive.

“All the member countries do not agree with my views,” he said. “I have to make that confession.”

Hollande said he would continue trying to get effective and swift growth measures despite opposition from German Chancellor Angela Merkel. His proposals, he added, do not mean he disagrees with the German leader that Europe must continue to carry out its pledges of fiscal discipline, which are contained in a treaty reached in December after lengthy diplomacy by Merkel and Hollande’s predecessor, Nicolas Sarkozy.

“There is still a lot of persuasion work to be carried out between now and the end of June,” he added dryly.

The leaders have scheduled another summit for June 28 and 29, by which time Hollande said the outlines of a growth pact should be clearer. But he gave no indication that the dispute with Germany was rounded off by the evening’s long discussions.

The E.U. president, Herman van Rompuy, predicted that proposals for a growth pact will still require work even after the June gathering, implying that agreement on a convincing package of measures was far from assured and that any meaningful stimulus for Europe’s withered economies would be further postponed. “It’s too soon at this stage to say in what framework we will work,” he told a post-summit news conference.

For Merkel, the issue of euro-bonds is a political no-go zone, repudiated by German taxpayers who have no desire to countersign on loans for their spendthrift neighbors. Her government, at a pre-summit background briefing in Berlin on Tuesday, declared again that it views eurobonds as a mistaken idea and will not be changing its mind no matter what Hollande says.

Despite the German stand, Hollande won some support from the Paris-based Organization for Economic Cooperation and Development and the International Monetary Fund, both of which suggested that the solidarity of jointly backed credit might help stalled economies make necessary investments. But it will depend on how much support he can secure from other E.U. leaders whether the eurobond proposal lives on or dies under Merkel’s disapproval.

Berlin has indicated it is willing to endorse smaller steps, such as project bonds for construction or an increase in borrowing power by the European Investment Bank. But German officials caution that neither move would have a major impact, given the scale of Europe’s problems and that most new growth measures would have to come from individual countries’ own hard work. “There is no one-size-fits-all strategy,” said Steffen Kampeter, deputy finance minister.

European markets were pummeled Wednesday as fear about the euro crisis grew. Spain’s borrowing costs have been rising for weeks, while investors have scurried to Germany’s rock-solid safety. On Wednesday, Germany borrowed $6.3 billion at 0.07 percent interest in an auction of two-year bonds, as fearful investors essentially paid the German government to hold onto their money.

Eurobonds, advocates say, would ease struggling countries’ borrowing costs as they work to overhaul their economies.

“These poor guys,” said Daniel Gros of the Center for European Policy Studies in Brussels, noting that the summit is Hollande’s first. “They just wanted to get to know one another, and now everybody expects them to save the world.”

Gros said the eurobond showdown dramatizes the difficulty in trying to create a common currency among nations without a common economic policy. The Greek crisis, with the country’s threat of a pullout from the euro zone, is a perfect example of letting the ideal of European unity get ahead of the facts on the ground, he added.

“All of those grandiose plans to create a political union to support the euro with a common fiscal policy cannot work as long as E.U. member countries remain both democratic and sovereign,” he wrote in a recent paper.

For instance, then-Greek Prime Minister George Papandreou proposed a referendum in October on an E.U. rescue package that called for severe sacrifices from the Greek people. Merkel and Sarkozy intervened to prevent the vote, fearing their rescue package would be torpedoed. But Gros noted that the general election in Greece amounts to a referendum on the issue anyway.

Birnbaum reported from Berlin.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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