Top official floats Europe growth pact as recession fears gather

By Jan Strupczewski and Randall Palmer

WASHINGTON (Reuters) - A top euro zone official proposed a new growth deal for Europe on Friday as fellow finance diplomats from around the globe sounded alarm over the continent's faltering growth and pressed for action to ward off a recession.

The International Monetary Fund, which cut its global growth forecasts for the third time this year ahead of its fall meetings this week, said Europe's weakness was a matter of particular concern, a sentiment echoed by many policymakers, private economists and investors.

European officials in Washington for the IMF meetings sought to dispel the gloom.

Jeroen Dijsselbloem, the chairman of euro zone's finance ministers, used the forum to propose a new pact for Europe that would reward countries that pursue ambitious economic reforms with EU funds and leeway on budget targets.

"There is no reason for this gloominess about Europe," Dijsselbloem told Reuters. "Those countries that have actually implemented the strategy and done the reforms, have returned to growth, in southern Europe, in the Baltics, in Ireland. Which once again proves that reforms do not hurt growth, but help recovery quite quickly."

It would take months of political negotiations for the proposed pact to take shape. In the meantime, a steady stream of poor economic data looks set to keep Europe's partners on edge.

"The biggest risk to the global economy at the moment, certainly the biggest risk to the UK economy at the moment is the risk of the euro zone falling back into recession and into crisis," British finance minister George Osborne told reporters.

Osborne joined other officials in voicing skepticism about infrastructure spending as the latest prescription for a world economy that six years after the global financial crisis was still struggling to find a firm footing. The IMF has said infrastructure spending could give economies a near-term boost, while improving long-term growth prospects as well.

The Group of 20 major industrial and developing powers that account for 85 percent of global economic output agreed at a meeting last month to prop up growth over the coming years largely via targeted public investment in infrastructure. But since then fresh evidence of weakness in the euro zone, including in its powerhouse Germany, has unsettled financial markets and heightened the sense of urgency.

German exports, industrial orders and output suffered their sharpest declines since the depths of the global financial crisis, data showed earlier this week, raising the specter of Europe's biggest economy slipping into recession.

Global shares hit a seven-month low on Friday, while oil prices skidded to their lowest level since 2010. After a long rally, the U.S. dollar was poised for its first weekly drop in 13 weeks on the view the Federal Reserve may have to delay tightening U.S. monetary policy.

"It's panic mode. Panic and capitulation," said Carsten Fritsch, commodities analyst at Commerzbank.

GERMANY IN FOCUS

While other euro zone governments are hamstrung by excessive debt and fiscal deficits, the IMF, the United States and other G20 members have repeatedly called on Germany to use its wiggle room to ramp up spending and shore up sagging growth.

This week the country's leading economic institutes joined the chorus, urging the government to cut corporate taxes, spend more on infrastructure and education, and take steps to encourage private investment.

Berlin, however, has consistently rejected such calls and maintained its commitment to the goal of balancing the federal budget next year.

Finance Minister Wolfgang Schaeuble repeated in Washington his mantra that Europe needed economic reforms not "writing checks." Yet evidence of further weakness and a threat of recession might still force Berlin's hand, senior officials told Reuters earlier this week.

In contrast, France and Italy have announced budget plans that fail to meet commitments to trim their deficits, and EU officials were engaged in last-minute efforts to persuade Paris and Rome to tweak the drafts to avoid likely rejection.

France was to reduce its budget shortfall below the EU ceiling of 3 percent of GDP by the end of 2013, but it was granted an extra two years because of a euro zone recession.

"How was that time used? It was not used. So we should not do this again," the hard-line Dijsselbloem told the Atlantic Council in Washington.

(Additional reporting by Krista Hughes and Jason Lange; Writing by Tomasz Janowski; Editing by Tim Ahmann and David Chance)