Europe seeks growth as austerity takes its toll

BRUSSELS -- Europe's leaders have said they are committed to supporting economic growth, in a concession that their focus on austerity as the key to solving the debt crisis is not working as unemployment hits record highs and recession looms over the region.

The heads of the 27 European Union governments meeting at a summit in Brussels on Thursday discussed how to improve economic activity and create jobs. But with public policies hamstrung by the commitment to reduce debts, the leaders were short on concrete proposals. Rather than stimulus, they are considering gradual structural reforms such as cutting red tape and improving business conditions.

"This was not a meeting focused on crisis management, it was a meeting focused on growth," said European Commission president Jose Manuel Barroso after the summit, which for the first time in months was held under relatively calm conditions in financial markets.

Nowhere is the effect of Europe's austerity policy more obvious than in Greece, which faces a fifth year of recession as it strains to push through a list of austerity reforms required to tap its bailout loans.

The finance ministers of the euro currency union, who met in Brussels ahead of the get-together of heads and state and government, signed off in principle on a first batch of bailout money Greece needs to implement a massive debt relief deal with private investors.

But the final green light for as much as $125.69 billion -- which Greece needs to implement the debt swap deal -- will only come next Friday, once Athens has implemented the last of a series of austerity reforms, the finance ministers said in a statement.

That means Athens will have to wait at least another week before it knows for sure whether it can avoid bankruptcy later this month. Many investors feared an uncontrolled default even by relatively small Greece could end the recent calm on financial markets.

The ministers said the first payout from the overall $173 billion aid package can go ahead only once Athens has passed "a few pending implementing acts" for promised austerity measures.

"The list of prior actions (Greece had to implement) is so long, that we prefer to look at it twice," said German Finance Minister Wolfgang Schaeuble.

Schaeuble also said that ministers wanted to wait and see how many banks and investment funds will actually participate in the bond swap.

Private investors have until next Thursday to decide whether they will swap their Greek bonds for new ones with a lower face value, lower interest rates and longer repayment periods.

Overall, bondholders will lose more than 70 percent of the value of their holdings, but in return they will receive some of the money they are owed immediately and have at least the hope that they will get some more of it back in 30 years.

Of the (euro) 93.5 billion Greece needs in the coming weeks, as much as (euro) 35.5 billion are immediate payouts for banks and other investors participating in the bond swap.

Around (euro) 23 billion will be used to recapitalize Greek banks that would otherwise collapse under the losses from the debt relief.

The remaining (euro) 35 billion will go as collateral to the European Central Bank while Greece's own bonds are rated in selective default. That money will be freed up again once Greece's rating improves.

But even if the Greek deal goes ahead as planned, Europe faces a long road of recovery and policymakers appeared set to continue their frugal approach to solving the continent's economic woes.

New figures showed that unemployment in the 17-country eurozone hit 10.7 percent in January -- the highest level since the currency union launched in 1999. Youth unemployment stood at 21.6 percent, with Spain's rate at a staggering 49.9 percent.

Policymakers across Europe have made spurring growth and jobs their new mantra, but so far their proclamations have yielded few results. Many economists want governments to stop slashing budgets as the continent heads into another recession, warning that more cuts will further destabilize the economy and make the debt situation even worse.

"This crisis and some remedies puts social cohesion at stake. It can also damage the European idea itself," said EU President Herman Van Rompuy, who was handed another 2 1/2-year term on Thursday. "That is why we have to tackle inequalities and poverty."

But political leaders say that large-scale spending won't kick-start growth. Governments are betting instead on reforms to modernize the economy by cutting red tape, making it easier to hire and fire people, and investing in infrastructure projects.

"The general remark I hear is that if times are tough, you don't have to have austerity -- well, I don't share that," said Dutch Prime Minister Mark Rutte said. "Your government finances have to be up to scratch because it gives confidence to markets, to investors, to your own citizens to spend wisely. So we want to have our budget in order."

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Raf Casert, Don Melvin and Robert Wielaard contributed to this story.