Europe growth pact floated as euro zone recession fears mount

Monday, 13 October 2014 00:00 - - {{hitsCtrl.values.hits}}

Reuters: Heeding global calls for action to shore up Europe’s sagging economy, euro zone’s top finance official proposed a new growth pact on Friday to break a policy logjam and spur reforms by rewarding countries with cheap funds and leeway on budget targets. The International Monetary Fund, which cut its global growth forecasts for the third time this year this week, flagged Europe’s weakness as the top concern, a sentiment echoed by many policymakers, economists and investors.

International Monetary Fund (IMF) Managing Director Christine Lagarde gives opening remarks before a session addressing inclusive growth during the IMF-World Bank annual meetings in Washington – REUTERS European officials in Washington for the IMF and World Bank annual meetings sought to dispel the gloom, with European Central Bank President Mario Draghi talking about a delay, not an end, to the region’s recovery. Jeroen Dijsselbloem, the chairman of euro zone’s finance ministers, used the forum to propose a new “growth deal” for Europe offering nations embarking on ambitious economic reforms more fiscal wiggle room and low-interest EU funds. “There is no reason for this gloominess about Europe,” Dijsselbloem told Reuters. “Those countries that have actually implemented the strategy and done the reforms, have returned to growth, in southern Europe, in the Baltics, in Ireland. Which once again proves that reforms do not hurt growth, but help recovery quite quickly.” It would take months of political negotiations for the proposed pact to take shape. In the meantime, a steady stream of poor economic data looks set to keep Europe’s partners on edge. “The biggest risk to the global economy at the moment ... is the risk of the euro zone falling back into recession and into crisis,” British finance minister George Osborne told reporters. U.S. Treasury Secretary Jack Lew repeated a familiar mantra that nations with strong economies and sound public finances should do more to shore up global demand. “Demand and structural supply side reforms should go hand-in-hand to catalyse stronger growth,” he said in a statement. Several officials, including Osborne, voiced skepticism about infrastructure spending as the latest prescription for a world economy that six years after the global financial crisis was still struggling to find a firm footing. The IMF has said infrastructure spending could give economies a near-term boost, while improving long-term growth prospects as well. The Group of 20 major industrial and developing powers agreed last month to prop up growth over the coming years largely via targeted public investment in infrastructure. But since then fresh evidence of weakness in the euro zone, including in its powerhouse Germany, has rattled financial markets and heightened the sense of urgency.