With the United States and financial markets pressing for decisive action, European leaders will meet Wednesday on their region’s widening debt crisis amid a new forecast that suggests the broad eurozone will finish the year in recession.
The Organization for Economic Cooperation and Development, the Paris-based statistical arm of wealthy nations, issued an outlook that projects that the economy of the entire eurozone will contract 0.1 percent this year. It also predicted that next year’s growth would be just 0.9 percent.
The OECD’s projections added to the sense of urgency surrounding what was billed as an informal dinner among European leaders in Brussels to discuss ways to stimulate growth. But the leaders remain far apart on the biggest issues, and it’s unclear whether they’ll agree on steps that would ease the pain of policies that have called for cutting government budget deficits but not for stimulating the economy.
The prospect of a European recession is grim news for the United States and its tenuous economic recovery. Many American corporations sell and manufacture in Europe, and the wealthy region has been a primary market for U.S. exports.
U.S. stocks already have been staggering in the past month over the prospect of a prolonged debt crisis in Europe, leaving Americans and their retirement plans poorer in the process.
"The European area remains the single most serious risk to the global economy, and recent events have increased that risk," said Pier Carlo Padoan, the OECD’s chief economist.
President Barack Obama was blunt Monday when he called for stronger action from Europe to stimulate its economy.
“Acting forcefully rather than in small bite-sized pieces and increments, I think, ends up being a better approach," Obama said during a news conference at the close of a NATO summit in Chicago.
The accumulation of European economic problems has been accelerating in recent weeks. Last week, Moody’s Investors Service downgraded the creditworthiness of 16 Spanish banks – most of them loaded up with bad home loans – and Spain’s creditors began to worry that the indebted Spanish government won’t be able to prop up its banks and sagging economy. The Spanish government announced this week that it would have two independent firms conduct stress tests on its banks in a bid to reassure investors.
The OECD forecast came as Europeans debate whether they should continue a course of fiscal austerity – lowering deficits by cutting spending and raising taxes – or boost spending to stimulate the economy.
The OECD made clear Tuesday that it supported issuing Europe-wide bonds, championed by new French President Francois Hollande. He’s expected to bring up the issue at Wednesday’s dinner despite stiff opposition from a group of nations led by Germany.
“You have to put all the instruments on the table,” OECD Secretary-General Angel Gurria said.
Hollande, Italian Prime Minister Mario Monti and some other European leaders back the eurozone bonds – debt guaranteed by all 17 countries that use the euro – as a way for Greece and other debt-ridden nations to raise cash more cheaply.
But the plan represents a red line for Angela Merkel, the chancellor of Germany, whose relatively stable economy would have to underwrite the common bonds and which views the proposal as akin to better-off nations picking up the tab for countries that mismanaged their finances.
“The problem comes from a lack of competition in these economies and too much public debt,” one European diplomat said, speaking only anonymously because he wasn’t authorized to talk to journalists. “Euro bonds won’t help these countries.”
Advocates of euro bonds think the crisis will ease when the European Central Bank stands behind euro-wide bonds. This, they argue, would address investors’ fears that some members eventually might leave the zone and its common currency rather than pay their debts.
The economic outlook across Europe is growing bleaker, according to the OECD data.
It said Greece’s economy was expected to contract a stunning 5.3 percent this year, Portugal’s 3.6 percent, Spain’s 1.6 percent and the Netherlands’ 0.6 percent. Even the largest economies in the zone – Germany’s and France’s – were projected to grow at anemic rates of 1.2 percent and 0.6 percent respectively.
Padoan, the OECD’s chief economist, said Europe’s richer northern nations needed to do more to stimulate growth that could pull up neighbors. The poorer southern countries must address their lack of competitiveness more aggressively by ending state subsidies and trimming bloated bureaucracies, he said.
Appearing to side with France and others that want greater government spending to create demand, Padoan said, "The single market can deliver much more growth. It should be further boosted."
So contentious is the euro bond issue, however, that European officials didn’t list it as part of the official agenda for Wednesday’s dinner. If it comes up, they added, it will be at the end of the working meal.
Perhaps the only area where European leaders will achieve consensus is on a pilot program to issue some 230 million euros – $293 million – in limited “project bonds” for railway, energy and other infrastructure projects through 2013. The funds are aimed at boosting employment and tying European economies more closely together. But this plan, too, came together only after German officials lobbied to have the program reassessed after a year, diplomats said.
“Project bonds are a nice idea, and this will be an evaluation phase,” the European envoy said. “But in the end it’s not money that Europe needs but good projects.”
Experts cited growing pressure from voters in Greece, France and Britain to create jobs and loosen the public purse strings as arguing for the bonds. But some warned that the project bonds as proposed now wouldn’t deliver the jolt that Europe needs.
“These are projects that would not deliver growth overnight,” said Marco Incerti, a research fellow at the Center for European Policy Studies, a research center in Brussels.
“We are talking about major projects that would take years to become operational or even start to be built. The positive impact of these kinds of projects would be felt two, three or five years down the line. It’s not going to help the immediate problem of slow growth and increasing debt.”