Davos rings with palpable hope eurozone is edging away from crisis

There is a palpable sense of hope at the annual Davos World Economic Forum that the eurozone is edging away from the brink of catastrophe.

Nonetheless, business leaders say Europe’s woes are still holding back a global recovery. A growth strategy is the missing ingredient in the policy cocktail that eurozone leaders are mixing to save the currency bloc from break-up. Without recovery, re-election will be tough for leaders in Europe and beyond this year.

Part of the growth problem is that Germany insists other eurozone states must pursue the kind of structural reforms that helped it regain competitiveness in the last decade, even if these risk sending weaker economies into a deflationary spiral.

Many senior eurozone officials, busy trying to fix the crisis, can only afford to spend one day at the conference. In the past, they came for several.

One such official is European Central Bank President Mario Draghi, who takes part in a panel discussion tomorrow called Europe’s Economic Outlook: What steps are needed to restore growth and confidence across the eurozone?

Under Draghi, who took the ECB helm in November, the central bank has funnelled almost half a trillion euro in cheap, three-year loans called LTROs to banks in an effort to head off a credit crunch and give them the means to buy sovereign bonds.

There are signs the ploy is working, with investors flocking to buy Spanish bonds and Italian yields well below the 7% level that alarms markets, despite Standard & Poor’s downgrading the credit ratings of nine eurozone countries.

Yet this measure has not dispelled growth concerns.

Financial market participants say they are more concerned about the absence of growth in the eurozone than about budget deficits and public debt levels, because growth is what will enable countries to service and repay debts over time.

“It looks like the LTRO is having a positive contribution. Does it solve all of the problems sustainably? Probably not,” said Andrew Bosomworth, a senior portfolio manager at Pimco. “At the end of the day, it comes down to growth; that’s what these countries need to keep their debt sustainable.”

The latest forecasts suggest Greece and Portugal are stuck in deep recessions, reducing their revenues and hence their ability to meet fiscal targets. Spain and Italy are expected to be in recession this year and next, raising the same concerns.

Even Germany, the eurozone’s locomotive economy, faces a “growth dent”. The economy contracted by about a quarter of percentage point in the last quarter of 2011 and many officials see little growth in the first three months of this year.

In the absence of a long-term growth plan for Europe, financial investors remain wary.

“Europe has not yet reached an equilibrium where we can wake up each morning and worry about some other region of the world,” said Pimco’s Bosomworth.

Reuters