Austerity debate flares as Europe recovery fades

FRANKFURT, Germany (AP) - Europe's economic recovery is in danger. Governments are under pressure to save it, but struggling with political obstacles and disagreement among themselves over what to do.

Instead, the region is pinning its hopes - once again - on the European Central Bank, which is expected to launch new stimulus measures if the economy gets any worse.

Europe's lack of growth is looming larger and larger, however, and the ECB says it can't save the economy alone.

For more than five years since the eurozone hit turbulence over too much debt in 2009, governments' answer has been to raise taxes and restrain spending. And there's been some progress. Deficits have shrunk, and countries that needed bailout loans are slowly getting their act together.

But second quarter growth was zero, after only four quarters of measly expansion. While unemployment in the United States has fallen to 6.2 percent from 10 percent at its peak in October 2009, Europe's is at 11.5 percent - still near last summer's 12 percent. The risk is that the eurozone remains stagnant for years - bad news not just for its people but also its three major trading partners: the U.S., Britain and China.

As worries spread, the debate over austerity versus growth is sharpening again. EU leaders will meet Oct. 6 to discuss growth, while the ECB will hold a policy meeting Thursday.

ECB President Mario Draghi is ringing the alarm.

He says the central bank can't do it all alone and that governments should dial back austerity, within EU rules aimed at restraining deficits. "It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this," Draghi said. Government spending can help boost growth by providing demand when the private sector is struggling.

Draghi's not the budget boss, however. Each of the eurozone's 18 member governments decides its own spending. Germany, Europe's biggest economic and political power, and Chancellor Angela Merkel are sticking with the emphasis on austerity. Countries with extremely high debt, such Italy, are under pressure to keep the lid on spending.

Some economists think much more needs to be done. Francesco Giavazzi and Guido Tabellini at Bocconi University in Milan say the 18 eurozone governments should do a coordinated 5 percent tax cut, spread their budget balancing efforts over an extra 3-4 years, and issue long-term bonds that the ECB would buy. That's unlikely to happen, as such steps would run into legal and political objections.