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Europe's leaders urged to opt for growth

Larry Elliott

Europe's leaders met on Wednesday for crisis talks to rescue the euro amid a warning from the West's leading economic think-tank.

Europe’s leaders met on Wednesday for crisis talks to rescue the euro amid a warning from the West’s leading economic think-tank that persisting with strict austerity programmes risks a vicious circle that could derail the tentative recovery in the global economy.

Shares rallied on hopes that the summit in Brussels would find a solution to the debt crisis by backing proposals from new French president François Hollande that will boost growth andcreate jobs.

But tensions remained between Paris and Berlin, where Angela Merkel’s government maintained its strong opposition to the creation of common eurobonds, which would cut the borrowing costs of the heavily indebted countries facing intense financial market pressure.

In its half-yearly update on the global economy, the Organisation for Economic Co-operation and Development said the 17-nation single-currency area was on course to contract by 0.1% this year, with deep contraction in the countries of southern Europe. But, it said, a worsening of the debt crisis could result in output falling by as much as 2%. The organisation, which has 34 rich members, said it expected Greece to contract by 5.3%, Portugal by 3.2%, Spain by 1.6% and Italy by 0.9%.

Pencilling in a return to modest 0.9% growth in 2013, the organisation’s chief economist, Pier Carlo Padoan, said: “The risk is increasing of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.” He urged Europe’s leaders to adopt a “growth compact”, which would help countries to tackle their budget deficits through faster expansion.

Growth
Because developing countries such as China were still growing strongly, the think-tank said global growth this year would be 3.4%, down from 3.6% in 2011, before rising to 4.2% in 2013. But growth among the organisation’s members would be held back by Europe and would ease from 1.8% to 1.6% in 2012 before recovering to 2.2% in 2013. Of the big rich nations, the United States and Japan would grow most strongly, whereas Britain was expected to grow by just 0.5% this year, accelerating to 1.9% in 2013.

“We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies,” Padoan said. “We also see flat growth in the euro area, which hides important differences, with northern countries growing and southern countries in recession.”

Padoan expressed concern about a debt default in Greece and the shaky condition of Spain’s banks, but said the emergency action by the European Central Bank, including a €1-trillion liquidity injection, had so far prevented the debt crisis from spiralling out of control. “If the situation gets worse, there are ways to enhance the firewall capacity, which could include a stronger intervention or role of the ECB,” Padoan said.

In contrast to the eurozone, the US was expected to continue to ­benefit from easy credit conditions and ultra-loose monetary policy. The world’s biggest economy was forecast to grow by 2.4% this year and by 2.6% in 2013. Japan’s 2% growth this year would be boosted by a construction boom following the tsunami in 2011 and  China would expand by 8.2% in 2012 and 9.3% in 2013.

The Organisation for Economic Co-operation and Development predicted that the United Kingdom would recover this year from its double-dip recession. The think-tank maintained its previous 0.5% growth forecast for 2012 and raised its 2013 prediction a notch to 1.9%.

“Fiscal consolidation is a drag on growth,” the organisation said. “However, fiscal policy remains heavily constrained. The ambitious government plan to restore fiscal sustainability remains on track and appropriate.” – © Guardian News & Media 2012
Larry Elliott is the Guardian’s economics editor

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