­A New European Growth Agenda

BRUSSELS – Austerity alone cannot solve Europe's economic and financial crisis. Growth and jobs need to be promoted with equal zeal. European Union leaders now recognize this: kick-starting growth in 2012 was high on the agenda at the European Council’s meeting on January 30. But the big question remains: How?

The need for immediate action is clear. The eurozone’s economy contracted in the last three months of 2011; even Germany’s shrank. The new year is looking grim. France is flat-lining (as is Britain). Italy and Spain have sunk into deep recession. Greece is in its fifth year of a slump. And eurozone unemployment is at record highs, with nearly one in two young people jobless in Spain and Greece.

The economic headwinds are formidable: fiscal austerity, high interest rates outside AAA-rated countries, credit cutting by banks, deleveraging households, weak private-sector investment, and declining exports as the global slowdown undermines demand.

Until growth resumes, any tentative financial stabilization will be extremely fragile. Recession will hit banks’ and governments’ already-weak balance sheets, increasing pressure for faster deleveraging. But, while gradual adjustment is essential, faster and deeper cuts are largely self-defeating: big reductions in private credit and government spending will cause a sharper slowdown – and thus a vicious downward spiral. A big new push for growth is therefore vital.