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Europe's economic chill

Gavin Hewitt | 11:29 UK time, Friday, 8 January 2010

Shoppers in Madrid, 7 Jan 10Europe has started the year gloomily. It seeps into conversations. Almost no one I meet believes that Europe's economies will rebound strongly this year.

The Economic Sentiment Indicator only inches up. In some places, like Greece, consumer confidence is actually dipping. A few fear the economic recovery is losing momentum. The majority see a spluttering, fitful rebound with growth across Europe of no more than 1%.

The new President of the European Council, Herman Van Rompuy, peers into the future and concludes that the continent's long-term outlook is "not great". In the eurozone countries one in 10 people who could be working is now unemployed. Nearly 23 million people across the EU are jobless. Youth unemployment is expected to rise further this year.

China has taken over from Germany as the world's largest exporter. In speech after speech you detect that Europe is racked with concern over its lack of competitiveness.

Now amid this January hand-wringing step up the Spanish Prime Minister, Jose Luis Rodriguez Zapatero. He is launching Spain's six-month presidency of the EU and determined to be heard, despite the fact that the EU has another permanent president in Herman Van Rompuy.

Prime Minister Zapatero is also worried about the future. He wants an overhaul of Europe's economy with a new strategy to raise competitiveness, stimulate job growth and increase research and development.

No one, I suspect, would argue with his intentions, but plenty might with his remedy. The answers lie in deeper European co-operation. "The path ahead," he said, "is of more economic union". Mr Zapatero wants an economic strategy which is binding on EU countries.

"We need," Mr Zapatero went on, "to have a vision, in which the European interest is the vision of every member state.  If Europe wants to keep its strength then it must unite in a globalised world. We need to change the direction the debate is taking."

It may be that, with nearly four million Spanish workers without jobs, Prime Minister Zapatero prefers to turn the economic debate into a push for more European regulation. Others are likely to submit different questions in this grand 2020 strategy debate. How are jobs created? What tax regimes encourage start-up companies? What employment laws encourage mobility of labour? What is the best balance between the public and private sectors to encourage growth? How best to build the knowledge-based industries that can take on the rest of the world?

As Europe grapples with its economic worries Greece stares them in the face. It is reeling under a mountain of debt. The men in white coats from the European Commission and the European Central Bank are in Athens, poring over Greece's plans to reduce its deficit.

The questions are these: Can a convincing plan be worked out that will hack the deficit back? If it can't, should Greece be bailed out? If the answer is 'no' what are the implications for other eurozone countries and for the wider fragile European economy?

The markets don't believe Greece's books can be trusted. They doubt the stats. That will take some fixing. Athens says it will reduce the deficit to 3% of Gross Domestic Product by 2012. It insisted today that this was not done under pressure from the EU. Maybe.

But what if the plan doesn't work and public debt continues to rise? The voices from the edge are sounding tough. The Spanish Secretary of State for European Affairs, Diego
Lopez Garrido, insists "no bail-out". The chief economist at the European Central Bank has warned that Greece can't expect a financial rescue package.

So the government in Athens is working on an austerity package: salary reductions for public servants, tax hikes and a reduction in spending on social security. The unions are warning of strikes in the first week in February. Nothing is easy when it comes to sorting Greece out.

So here's the question: amid acute anxiety about the European economy will Greece be cut adrift? You wouldn't want to bet on it. Some bankers, who know a thing or two about such arguments, say Greece is too big to fail.

Listen to the French Finance Minister, Christine Lagarde. "I am confident," she said, "that with proper peer pressure and support from members of the eurozone, Greece will find its way back to where to should be". That smacks of compromise. The usual European way. And in chilly, gloomy times Europe does not want a full-blown crisis on its doorstep.

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