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Europe Seen Adding Growth to Budget Rules as Focus Shifts

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi gestures during a meeting where he is to brief the European Parliament's economic affairs committee and its chief Sharon Bowles on the eurozone debt crisis on April 25, 2012 at the EU Headquarters in Brussels. Photographer: Georges Gobet/AFP/Getty Images

Europe may add an annex to its budget treaty spelling out how countries can boost growth as the bloc shifts its emphasis on tackling the debt crisis, a German government official said.

Steps to raise competitiveness along with structural reforms are likely to feature in the prescriptions for growth, with a target date for completion by the June 18-19 Group of 20 leaders’ summit in Mexico, the official said on condition of anonymity because the discussions are private and not complete.

The change in tack was signaled yesterday by European Central Bank President Mario Draghi, whose call for a “growth compact” was quickly endorsed by German Chancellor Angela Merkel. Francois Hollande, the French Socialist presidential election front-runner, welcomed Draghi’s remarks as evidence of the need for treaty changes to boost growth, while questioning the means of getting there.

“It’s not the same idea of growth,” Hollande said in an interview on France Info radio today. Draghi is “adding even stronger competition, liberalization and privatization.”

That contrasted with Merkel’s reaction. Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” the chancellor told a conference of her Christian Democratic bloc in Berlin yesterday.

Competitiveness Pact

“The ever politically adept Merkel recognizes the push toward a growth pact but will not allow Germany to be out-maneuvered,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, said in a note to investors. “While the growth pact may be on the agenda, she will aim to drive its shape.”

Euro leaders have struggled to find a common way to promote economic growth even as they have demanded budget cuts to satisfy German priorities and settle markets. At a March 2011 summit, they endorsed Merkel’s so-called competitiveness pact that set targets on issues including cutting labor costs and raising the retirement age.

Draghi used a speech in Brussels yesterday to urge European leaders to widen their crisis response beyond cutting debt and deficits, the goal of the German-led fiscal pact signed by euro-area leaders in March.

‘Too Much Smoke’

“We’ve had a fiscal compact,” Draghi said. “What is most present in my mind now is to have a growth compact.”

That may mean an announcement on European Investment Bank financing of region-wide infrastructure projects within a month, said Douglas Borthwick, managing director and head of foreign-exchange trading at Faros Trading LLC in Stamford, Connecticut.

“There is absolutely too much smoke here for there to be no fire,” Borthwick said in an e-mail. “The new European mantra is fiscal discipline and growth.”

Germany, Europe’s biggest economy and the largest contributor to bailouts for Greece, Portugal and Ireland, is facing demands from across the region to ease its emphasis on austerity as a $1 trillion firewall and unlimited ECB loans fail to stop the crisis from threatening Spain and Italy.

‘Main Risk’

Draghi’s comment “illustrates the depth of concern felt by the ECB about the weak outlook for the euro area economy,” said Julian Callow, chief European economist at Barclays Capital in London. “It perhaps could be a closet call for Germany to provide greater fiscal stimulus given its low budget deficit.”

Hollande called the remarks helpful and said France won’t ratify the fiscal pact in its current form if he is elected.

“The main risk at this time is that the European economy remains in a recession because not enough credit is provided to companies,” he told a news conference in Paris. For all the differences on how to spur growth, “he does say that we cannot just keep on with austerity, with sanctions, and he wants to add a growth pact to the budget pact. I have never stopped asking for that.”

The growth pact may take the form of an annex to the fiscal compact in which country-specific recommendations for growth-boosting measures would be made, the German official said. This does not include the option of deficit-financed growth packages, the official said, adding that the French government may see that differently after the election.

Draghi Remarks

“I see how, for example, the Socialists in France react to that, with triumphant cheers, because they interpret growth as debt-financed stimulus programs,” Christian Democrat budget spokesman Norbert Barthle said today in a speech in the lower house of parliament in Berlin, referring to Draghi’s remarks. “We understand that to mean a strengthening of competitiveness and that’s a fundamental difference.”

Setting his sights beyond France’s runoff vote on May 6 that polls suggest he will win, Hollande said yesterday that he’ll be “firm and friendly” with Merkel. “We’ll have to open the discussion. There’s no need to create a conflict, even if we’re not here to hide our divergences.”

The European Union’s head office asked yesterday for a growth-boosting 6.8 percent budget increase to 138 billion euros ($182 billion) for 2013, challenging contributor countries from Britain to Germany to put up more money at a time of austerity and recession.

Merkel, who spent months lobbying fellow leaders for the fiscal pact signed on March 2, said budget rigor isn’t the only solution to the crisis. “We need growth in the form of sustainable initiatives, not simply economic stimulus programs that just increase government debt,” she said in Berlin.

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