EU Summit to Focus on Growth and Job Creation

European leaders are expected to focus mainly on growth and job creation at a summit on Monday where they are due to approve a permanent rescue fund for the euro zone and put the finishing touches on a so-called “fiscal compact” for stricter budget discipline.

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With evidence mounting against austerity alone as a means of tackling the debt crisis, European leaders meeting in Brussels today are expected to work on giving debt-laden countries plagued by high unemployment rates and shrinking gross domestic products a dose of economic growth.

Most of the European Union’s 27 leaders are set to agree on Germany’s fiscal pact to write balanced budget rules into their national law, effectively outlawing deficit spending. But the new compact will only help to prevent future sovereign debt problems, and EU leaders are expected to use today’s summit — the seventeenth in two years — to shift the narrative away from politically unpopular austerity and towards growth.

A draft of a summit communiqué calls for “growth-friendly consolidation and job-friendly growth,” an indication that leaders have come to realize that austerity measures alone risk stoking a recession and plunging fragile economies into a downward spiral, as has been the case with Greece.

EU leaders are expected to agree that up to 20 billion euros of unspent funds from the 2007-2013 budget be recycled toward job creation, especially among the young, as well as freeing up bank lending to small- and medium-sized companies. But with no new public money available for stimulus, leaders will focus mainly on promoting structural reforms, such as loosening labor market regulation, meant to encourage growth rather than simply cutting deficits, as has been the case in the past.

European Commission President José Manuel Barroso will propose better use of up to 82 billion euros in EU subsidies, though it remains unclear whether national governments will agree and how much could be done quickly.

The 27 EU nations will be asked to press on with a familiar list of proposals to liberalize their economies and remove bottlenecks, while several nations are also expected to champion a financial transaction tax

But while leaders discuss long-term structural reforms and better use of EU subsidies, they are unlikely to mention the one thing that many believe could have the greatest impact: a fiscal stimulus from Germany, the euro zone’s undisputed economic powerhouse. Still, some hope that if it gets the treaty it wants on fiscal discipline, Germany will be open to more far-reaching efforts to end the debt crisis.

European leaders will finally sign a treaty creating the European Stability Mechanism, a 500 billion-euro permanent bailout fund to become operational in July, as they agree to the terms of a fiscal treaty that would tighten budget rules for those signing up.

Though the ESM was meant to replace the European Financial Stability Facility — the temporary fund used to bail out Ireland and Portugal — pressure is mounting to combine the resources of the two funds to create a super-firewall of 750 billion euros.

Italian Prime Minister Mario Monti, International Monetary Fund Managing Director Christine Lagarde, and U.S. Treasury Secretary Timothy Geithner are among the plan’s many proponents, but Germany has so far resisted such a step, and Chancellor Angela Merkel has said she will not discuss the issue until leaders meet for their next summit in March.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said. But the German public has grown tired of bailing out the euro zone’s financially less prudent, especially since countries like Greece have resisted making necessary structural reforms unless they are under acute pressure.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com