European leaders agree limited growth package

Associated Press
European Council President Herman Van Rompuy speaks during a media conference at an EU Summit in Brussels on Thursday, June 28, 2012. European leaders gathering Thursday in Brussels are set to sign off on a series of measures to boost economic growth but expectations of a breakthrough on the pooling of debt have fallen by the wayside. (AP Photo/Virginia Mayo)
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BRUSSELS (AP) — European leaders meeting in Brussels agreed Thursday to devote €120 billion ($149 billion) for "immediate growth measures" to try to dig the continent's weakest economies out of crisis.

While some hailed the accord as a sign of progress for the troubled European Union and job creation, about half is money that had already been promised. And it is not seen as the powerful solution that markets are seeking to restore confidence in the eurozone and, by extension, the world economy.

The EU leaders announced the pact partway through Day 1 of a much-awaited summit in Brussels. Sharp divisions remain over the issue of pooling government debt as a way to ease the continent's financial crisis.

Spain and Italy are especially determined to push other leaders in Brussels — notably German Chancellor Angela Merkel — to make some gesture to cool markets and bring their borrowing costs down.

Herman Van Rompuy, president of the European Council, says the 27 heads of state and government would continue their discussion of how to achieve financial stability into the evening.

"They underperformed my low expectations," said Megan Greene, Director of European economies at Roubini Global Economics, assessing what the leaders have announced so far. The growth package "will help at the margins. It will make the recession less deep. But it won't create growth."

Van Rompuy said half the money in the new growth pact would come from increasing the lending capacity of the European Investment Bank by €60 billion, adding that "this money must flow across Europe, and at least to the most vulnerable countries" to help them grow out of the crisis.

That includes €50 billion in already existing EIB money, plus €10 billion in new capital, as it loans alongside private investors. But the EIB's board has cautioned that it may have difficulty in finding projects that meet its standards.

Then there are €55 billion in funds that were already earmarked in the EU's 2013 budget for growth projects in poorer regions around Europe.

Finally, the pact will make another €5 billion in "project bonds" available to invest in transport, sustainable energy and digital infrastructure. While the EU budget will provide some risk cushion for the EIB to finance the underlying projects, the EIB would have to cover the remaining risk.

"It's not just about injecting money. Growth is an overriding concern in every aspect of our work," Van Rompuy said.

Prime Minister Helle Thorning-Schmidt of Denmark, which holds the rotating presidency of the EU, said the growth and jobs compact would be formally adopted Friday, calling it "a light in the dark" for Europeans.

The total of €120 billion is not large in terms of the size of the economy of the European Union.

The funds for growth measures are a "very, very small step," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, D.C.

"That's more of a political fig leaf for Francois Hollande," Kirkegaard said. France's Socialist President Francois Hollande won election last month campaigning against austerity measures by his conservative predecessor and saying governments need to invest in stimulus instead.

More important to many observers is finding immediate ways to address the high borrowing costs currently faced by Italy and Spain.

European Commissioner for Economic Affairs Olli Rehn signaled that leaders would likely agree on some new measures that might reassure investors that Spain and Italy will be able to manage their debts.

"We also need concrete decisions on a short-term stabilization of financial markets, especially sovereign debt markets," Rehn said shortly before the summit began.

Merkel has rejected the most obvious way of reducing borrowing costs for the southern European countries: by quickly issuing "eurobonds," or debt backed by all countries.

She says eurobonds should be part of Europe's effort to integrate, but can only happen once national governments have agreed to give a central authority the power to change their budget policies. That could take years.

As the biggest economy among the 17 countries that use the euro, Germany would have to shoulder the brunt of the debt, and Merkel has been reluctant to expose German taxpayers. She is also concerned it would ease the pressure on financially weaker countries to reform their economies. That includes making labor markets more flexible, lowering business costs, cutting red tape and fighting tax evasion. Spain also needs to force its banks to cover massive losses from an imploded real estate markets.

"I think we should stop talking about eurobonds now because, with the German government's 'no,' with this definitive 'no' from Mrs. Merkel, eurobonds are now a non-issue," the president of the European Parliament, Martin Schulz, said Thursday.

While pressure on Merkel has been building, she is not alone in her opposition to eurobonds. Austria, Finland and the Netherlands are also opposed, among euro countries.

Five euro countries have so far asked for financial aid from their partners in the currency union. Greece, Ireland and Portugal have taken rescue loans to finance their government debt. Spain has asked for as much as €100 billion for its banks. Cyprus has asked for aid for its banks, as well.

Economists say Spain can only pay the current high rates — at 7 percent for 10-year money— for a few more months. After that, it is likely to ask for a eurozone bailout to finance its government debts. That rescue money could range in the hundreds of billions of euros (dollars).

Italy's Prime Minister Mario Monti, at risk of losing his job because of voter frustration with budget cutbacks, said that Italians have made great sacrifices and gotten their country's deficit under control but the yields on Italian debt have soared to anyway. Italy's deficit was 3.9 percent of GDP as of the end of 2011, far lower than Spain's 8.5 percent. But its 10-year yield was above 6 percent.

Investors are looking for signs of a clear strategy to deal with the debt crisis, which is weakening economies across Europe, including Germany's. They are not hopeful, though, and sold off stocks across Europe on Thursday.

Even if Italy doesn't win concessions from Germany at the EU summit, Italians can at least point to one victory: a 2-0 win over Germany's team at the European football championships Thursday night.

There are no televisions, however, in the room where the leaders hold their meeting, which is chaired by European Council President Herman van Rompuy.

Even if the debate gets heated it should remain civil. Each leader must raise a paperweight with his country's name and flag when he or she wishes to speak.

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Don Melvin can be reached at http://twitter.com/Don_Melvin

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