Steps to raise competitiveness along with structural reforms are likely to feature in the prescriptions for growth, with a target date for completion by the June 18-19 Group of 20 leaders’ summit in Mexico, the official said on condition of anonymity because the discussions are private and not complete.

The change in tack was signaled yesterday by European Central Bank President Mario Draghi, whose call for a “growth compact” was quickly endorsed by German Chancellor Angela Merkel. Francois Hollande, the French presidential election front-runner, seized on Draghi’s remarks as evidence of the need for treaty changes to promote growth.

Draghi’s comment “illustrates the depth of concern felt by the ECB about the weak outlook for the euro area economy,” said Julian Callow, chief European economist at Barclays Capital in London. “It perhaps could be a closet call for Germany to provide greater fiscal stimulus given its low budget deficit.”

Germany, Europe’s biggest economy and the largest contributor to bailouts for Greece, Portugal and Ireland, is facing demands from across the region to ease its emphasis on austerity as a $1 trillion firewall and unlimited ECB loans fail to stop the crisis from threatening Spain and Italy.

Merkel Endorsement

Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” the chancellor told a conference of her Christian Democratic bloc in Berlin yesterday.

Merkel was responding to Draghi’s call in Brussels for European leaders to widen their crisis response beyond cutting debt and deficits, the goal of the German-led fiscal pact signed by euro-area leaders in March.

“We’ve had a fiscal compact,” Draghi said. “What is most present in my mind now is to have a growth compact.”

Hollande called the remarks helpful and said France won’t ratify the fiscal pact in its current form if he is elected.

“The main risk at this time is that the European economy remains in a recession because not enough credit is provided to companies,” the Socialist candidate told a news conference in Paris. While differences remain with Draghi on how to spur growth, “he does say that we cannot just keep on with austerity, with sanctions, and he wants to add a growth pact to the budget pact. I have never stopped asking for that.”

Fiscal Pact Annex

The growth pact may take the form of an annex to the fiscal compact in which country-specific recommendations for growth- boosting measures would be made, the German official said. This does not include the option of deficit-financed growth packages, the official said, adding that the French government may see that differently after the election.

“The new European mantra is fiscal discipline and growth,” Douglas Borthwick, managing director and head of foreign-exchange trading at Faros Trading LLC in Stamford, Connecticut, said in an e-mail. “I expect an announcement of Europe-wide infrastructure within the next month.”

Setting his sights beyond France’s runoff vote on May 6 that polls suggest he will win, Hollande said yesterday that he’ll be “firm and friendly” with Merkel. “We’ll have to open the discussion. There’s no need to create a conflict, even if we’re not here to hide our divergences.”

Euro leaders have struggled to find a way to promote economic growth even as they have demanded budget cuts to satisfy German priorities and settle markets. At a March 2011 summit, they endorsed Merkel’s so-called competitiveness pact that set targets on issues including cutting labor costs and raising the retirement age.

Budget Increase

The European Union’s head office asked yesterday for a growth-boosting 6.8 percent budget increase to 138 billion euros ($182 billion) for 2013, challenging contributor countries from Britain to Germany to put up more money at a time of austerity and recession.

Merkel, who spent months lobbying fellow leaders for the fiscal pact signed on March 2, said budget rigor isn’t the only solution to the crisis. “We need growth in the form of sustainable initiatives, not simply economic stimulus programs that just increase government debt,” she said in Berlin.

Germany has always regarded reducing debt along with measures to bolster economic growth as key to winning back financial-market confidence damaged during the debt crisis, Deputy Finance Minister Thomas Steffen said separately.

“Talking about fiscal discipline does not mean that Germany is, let’s say, more or less a kind of consolidation Taliban,” Steffen said at a Euromoney conference in Berlin. “We do not think it’s all about fiscal consolidation, we very much believe that the euro zone also needs more growth.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

http://www.bloomberg.com/news/2012-04-25/europe-shifts-crisis-focus-to-growth-as-merkel-backs-draghi-call.html

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