Europe Faces Difficult Search for Growth

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The slipping target underlines the austerity trap: To keep borrowing money by selling bonds to investors, Spain must show it is reducing its deficit, which was 8.9 percent of GDP last year. So it is severely cutting back spending. That removes stimulus from the economy. Partly as a result, the economy sank into recession. And as companies and people make less money, they pay less in taxes. The cutbacks make balancing the budget even harder.

In addition to letting deficit targets slip, European officials have talked about adding money to the European Investment Bank, a development bank that loans money for public projects, and finding ways to make quicker use of unspent EU aid funds that are typically used for things like roads, water treatment plants and ports to help poorer EU members catch up.

Prasad said such spending of EU funds could be "potentially useful if they can be packaged in a way that is politically acceptable in Germany."

Another trend happening in the background is larger wage settlements in Germany. Germany dominates as an exporter because it kept labor costs down with reforms in 2004. Some think less restraint on pay could boost consumption and spending on imports at home and even out trade imbalances within the eurozone. The top industrial union, IG Metall, won a deal for a 4.3 percent raise over 13 months in a key region in southwestern Germany over the weekend.

It's a trend that officials can bless, but it doesn't require action on their part.

Yet economists say that emerging measures such as slower deficit reduction and more EU infrastructure spending, while helpful, will not enough. Not enough money is involved.

A bolder growth strategy could include movement toward some form of group borrowing among all 17 eurozone countries to pay for public works projects, said Marc Ostwald, strategist at Monument Securities in London. That could be a prelude to eurobonds — collective borrowing and central control of budget spending. "The thing they absolutely have to decide is how they're going to move toward fiscal union," said Ostwald. "Germany may not want eurobonds right now, but there are going to be eurobonds."

Ostwald and other economists say dealing with Europe's banking system, on shaky ground for several years, would be one of the strongest measures Europe could take now.

An EU-wide guarantee for bank deposits could shore up depositors' confidence their money is safe no matter what happens at the national level. An EU-wide banking regulator with the power to force banks to restructure would improve the flow of credit and boost confidence. Europe's shakier banks are heavily dependent on emergency credit from the European Central Bank, a situation that has persisted for several years, starting with the onset of the global financial crisis.

"We have had a damaged financial system since 2007 and 2008 but it has never been addressed," said Nicolas Veron, senior fellow at economic think tank Bruegel in Brussels. He advocates a task force to restructure troubled banks along the lines of the one that led a restructuring of the U.S. automobile industry, in which General Motors and Chrysler shed debt and reshaped their businesses under bankruptcy court protection.

"As long as we have a sick financial system, it will be very tough to get investment and consumption back to levels compatible with robust growth in the eurozone," Veron said.

Yet all those more decisive solutions face obstacles. Germany is against collective borrowing to help more indebted countries, fearing it will pay the freight as the biggest eurozone member. National governments are reluctant to give up control over banks, wanting to promote their own financial industries. Letting countries slow down deficit reduction will only roil markets unless it is seen as part of a genuine effort to fix finances in the long term.

"There is no miracle," said Veron. "It is going to be a long hard slog in the best of scenarios."

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