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Thomas Klau: EU Has Not Turned the Corner

May 23, 2012

European leaders gather for an informal dinner summit in Brussels Wednesday, dominated by increasing calls for growth measures and gloomy news about the state of the eurozone economy. France's new president Francois Hollande is expected to champion a particularly controversial measure - eurobonds.

This latest meeting of European Union leaders takes place amid a changed political and economic landscape. To be sure, the main problem facing the 27 European leaders remains the same; creating jobs and growing the troubled eurozone economy. Pressure for strong and speedy action is mounting amid fears that the eurozone's weakest member - Greece - may soon exit the 17-nation currency union, a move that may spark a larger crisis.

"I don't think the eurozone has turned the corner," said Thomas Klau, who heads the Paris office of the European Council on Foreign Relations. "It's turned the corner in terms of the political will. I think the mainstream parties across the eurozone are very strongly committed to keeping the eurozone intact and see it through this crisis. But I don't think they've done enough to make that commitment work in practice."

European leaders received more grim economic news this week. A report by the Paris-based Organization for Economic Cooperation and Development warned the eurozone risked severe recession. The OECD's chief economist Pier Carlo Padoan called for swift action.

"Things have begun to deteriorate again recently. So we cannot rule out a downside scenario which, if ignited, could lead to serious repercussions worldwide," Padoan warned.

EU leaders are facing growing calls for injecting growth measures along with budget cuts in dealing with the eurozone crisis. That message was delivered by U.S. President Barack Obama at the Group of Eight summit at Camp David last week.

"Today we agreed that we must take steps to boost confidence and to promote growth and demand while getting our fiscal houses in order," Obama said. "We agreed to the importance of a strong and cohesive eurozone and affirmed our interest in Greece's staying in the eurozone while respecting its commitments."

France's new President Francois Hollande will be bringing that message to Brussels, during his first meeting with his European counterparts. His strong support of growth puts him at odds with German Chancellor Angela Merkel, who also wants strong doses of austerity and structural reforms.

The leaders of Europe's largest economies are also split on the concept of eurobonds - jointly issued bonds that could fund just about anything and might eventually replace the debt of a given EU country. Merkel is against them. But Hollande will push for eurobonds during the Brussels summit.

French Finance Minister Pierre Moscovici says all options will be considered in Brussels, including eurobonds. The idea is gaining traction in Europe. Several top EU officials, including European Commission President Jose Manuel Barroso, are for them.

At a recent news conference, Barroso outlined a more modest pilot of "project bonds."

It will be a completely new mechanism and system of getting some financing and investment in projects that are important in Europe.

Analyst Klau says these specific project bonds are one area where France and Germany can agree.

"That's essentially a joint bond-finance infrastructure project - roads for example - which would provide long-term stimulus to the economy," Klau said.

European leaders will likely be discussing other ways to stimulate Europe's economy, along with helping out large and troubled European banks, like those in Spain, which are floundering during the economic crisis.

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