* Markets rally masks concern about Europe growth strategy
* Greece increasingly seen as isolated euro zone case
* ECB cash eases euro zone tensions, for now
* Soros concerned about "deflationary debt spiral"
By Paul Carrel and Paul Taylor
DAVOS, Switzerland, Jan 25 There is a
palpable sense of hope at the annual Davos World Economic Forum
that the euro zone is pulling back from the brink of catastrophe
but business leaders are equally worried that Europe's woes will
hold back a global recovery.
A growth strategy is the missing ingredient in the policy
cocktail that euro zone leaders are mixing to save the currency
bloc from break-up. Without economic recovery, re-election will
be tough for presidents in Europe and beyond this year.
The 2,600 political and business leaders attending the
five-day Davos Forum met against a backdrop of improved market
sentiment driven by signs the euro zone may escape recession and
that intense market pressure on Italy and Spain is easing.
Greece is clinging to hope of a bond swap to avoid a starker
default, although a deal is far from assured. But markets seem
relatively unconcerned at the prospect of an enforced Greek
default, seeing the problem increasingly as a one-off event
divorced from developments elsewhere in the euro zone.
"I think we are on the verge of putting the acute phase of
the crisis behind us," said billionaire investor George Soros,
adding that he believed Italian sovereign bonds represent a
"very attractive" speculative investment.
"If we pass the Greek potential default, if we put that
behind us, I think we will be past that phase where the
financial markets are on the verge of a possible meltdown," he
said. Concerning Soros more than a possible Greek default were
the austerity measures demanded by Germany. These, he said,
would cause a "deflationary debt spiral".
Germany insists other euro zone states must pursue the kind
of structural reforms that helped it regain competitiveness in
the last decade. Opening the meeting, German Chancellor Angela
Merkel said Europe's leaders had shown by their actions in 2011
that they were committed to the success of the European project.
"Europe will be a more attractive place to invest and do
business when we get through this crisis, and we will get this
crisis. I'm certain," Merkel said.
The prevailing mood among delegates was that the bloc had
made progress - aided by European Central Bank liquidity and
tighter fiscal rules - but that growth was still missing.
Markets have rallied on promising signs from Europe - the
broad MSCI world equity index is up some 5
percent for the year so far - but this rally appears to be
losing steam and masks underlying concerns about growth.
"I think Europe has moved a long way in the last two or
three months in the direction of actually getting to policies
which could stabilise this situation," said Stanley Fischer,
governor of Israel's central bank.
But only 40 percent of chief executives worldwide are "very
confident" of revenue growth for their companies in the next 12
months, down from 48 percent in 2011, a PricewaterhouseCoopers
(PwC) survey of 1,258 CEOs showed on Tuesday.
Even if growth returns to Europe, the politics on the way
out of the crisis have opened up divides between North and
South, Germans and Greeks, Britain and the rest of Europe, said
Oxford Professor of European Studies Timothy Garten Ash.
"The scale of resentment is a huge political problem. We
won't come out with a sense of optimism of surging forward,"
Garton Ash said.
The ECB - rather than government leaders - won widespread
praise at the Forum for acting decisively to stem the crisis.
Under ECB President Mario Draghi, who took the job in
November, the central bank has funnelled almost half a trillion
euros in cheap, 3-year loans 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 percent
level that alarms markets, despite Standard & Poor's downgrading
the credit ratings of nine euro zone countries this month.
"What it is providing at the margin is extra demand for the
shorter term debt of the most affected countries, Italy and
Spain," Bank of Canada Governor Mark Carney said of the measure.
"(This) provides some room for manoeuvre for those countries
to undertake very difficult fiscal and structural reforms which
are absolutely going to be necessary to right this in the medium
term," he told Reuters.
But he said tackling these structural reforms would take a
"more determined, consistent effort over a number of years."
In Germany, a survey on Wednesday showing business morale
rose in January signalled that Europe's largest economy is set
to avoid recession
But the latest forecasts suggest Greece and Portugal are
stuck in deep recessions, reducing their revenues and their
ability to meet fiscal targets. Spain and Italy are expected to
be in recession this year and next, raising the same concerns.
EU leaders will hold a summit next Monday devoted to putting
forward a growth strategy. But it will be largely about pledging
labour market reforms, shifting taxation from labour to
consumption and better targeting existing and unspent EU funds,
with no new public money on the table.
Given Europe's very limited resources, the growth strategy
risks being seen as largely declaratory wishful thinking.
The euro zone crisis is hurting the bloc's neighbours.
Erik Berglof, chief economist at the European Bank for
Reconstruction and Development (EBRD), said a requirement for
European banks to increase their core capital buffers was having
an impact to the east of the 17-country bloc.
"A lot of measures are being taken by governments in the
euro zone to protect their own interests," Berglof said. "All
this is leading to a very rapid deleveraging in Eastern Europe."
He was working on a move similar to the 2009 Vienna
Initiative to maintain west European banks' exposure to eastern
Europe: "The basic objective of achieving a more coordinated
deleveraging is the same."
For others, the euro zone crisis poses a buying opportunity.
A survey of 800 business leaders in Asia, the Middle East
and North America by FTI Consulting found that 45 percent of
companies in Asia are either executing or looking to make
acquisitions in Europe in the next 12 months, compared with just
14 percent in the Middle East and 7 percent in North America.
For Turkey, straddling the divide between Europe and Asia,
the European project is still an attractive proposition.
"Cheer up Europe. You have seen worse. We have seen worse.
In European history we have put much more devastating crises
behind us," Turkey's Europe minister, Egeman Bagis, said at the
"Europe is still the best place to be, which is why my
country is still determined to join."