• 24 OCT 2011
By Alan Wheatley
(Reuters) - The warning signals for Europe's economy are flashing red, but the uncomfortable truth for policymakers is that a restoration of solid growth is hostage to a lasting solution to the euro zone's debt crisis.
After another weekend of summiteering in Brussels, the European Union seems no closer to breaking out of a vicious cycle of growth-dampening austerity leading to deeper deficit holes that in turn trigger demands for fresh belt-tightening.
Simon Tilford, chief economist at the Center for European Reform, a think-tank in London, said he expected no substantive change to current policy settings: fiscal policy was highly contractionary and monetary policy was relatively restrictive given the depth of the euro zone's malaise.
What's more, all countries in the bloc were trying to export their way out of their problems, sapping aggregate demand, and bank recapitalization plans risked leading to a credit crunch.
"We're not going to see meaningful reform of the euro zone's macro economic policy framework. It's not even under discussion. That is the single biggest obstacle to a recovery of economic growth," Tilford said.
The question, for EU leaders and markets alike, is how long voters -- not just in Greece, the center of the debt storm -- will put up with the oft-repeated promise of jam tomorrow.
"We need of course fiscal consolidation, but without growth our citizens will not be confident in their future and in the future of the economies in Europe," said Jose Manuel Barroso, the president of the European Commission, the EU's executive arm.
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