Cuts vs. spending: G8 leaders to grapple over cure for EU debt crisis

In this May 15, 2012 file photo, German Chancellor Angela Merkel, left, talks to new French President Francois Hollande in Berlin. AP

(AP) WASHINGTON - The leaders of eight of the world's biggest economies meet this weekend outside Washington, seeking to keep Europe's debt crisis from spiraling out of control and jeopardizing fledgling recoveries in the U.S. and elsewhere.

The turmoil in Greece is draining confidence in the 17 countries that use the euro. Borrowing costs are up for the most indebted governments. Depositors and investors are fleeing banks seen as weak. Unemployment is soaring as recession grips nearly half the eurozone countries. Global markets are on edge.

All that forms a tumultuous backdrop as representatives of the G8 countries - the United States, Germany, France, Britain, Japan, Russia, Italy and Canada - head to Camp David. Standing in the way of a breakthrough are disagreements over how to bolster Europe's economy and avoid a broader catastrophe.

In advance of the talks, German Chancellor Angela Merkel struck a conciliatory note this week. She said in a television interview this week that she was open to measures to help stimulate Greece's economy as long as the country honors its commitments to shrink its debts.

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U.S. Treasury Secretary Timothy Geithner applauded the softer tone emerging among European leaders.

"You are seeing them talk about a better balance between growth and austerity, meaning a somewhat more gradual, softer path toward restoring fiscal sustainability," Geithner said.

The shift shows that European leaders recognize that countries can't increase their economic growth if they're forced to focus solely on cutting spending and reducing debts. Geithner said European countries would benefit from investment in public works projects, like roads and schools.

At this weekend's talks, non-European leaders will seek assurances that European leaders can contain the damage from a banking meltdown in Greece. They worry about a panic that could spill into Portugal, Spain and other indebted European countries - and to nations outside the continent whose banks are connected to Greek banks.

"If there was a bank run in Greece ... would they know how to prevent it from spreading to other countries?" said Jacob Kierkegaard, a research fellow at the Peterson Institute for International Economics.

U.S. officials will be "looking for assurances that the Europeans are aware of what's needed to keep the euro together and are willing to take those measures."

The meetings begin Friday evening with an economics-focused summit at Camp David, the presidential retreat in Maryland's Catoctin mountains. They will end Saturday evening. Most of the officials will join a larger group of international leaders in Chicago for a national-security oriented NATO summit Sunday and Monday.

Investors have been shaken by the power vacuum in debt-stricken Greece. They fear the consequences if Greece refuses to impose deep spending cuts agreed to under a bailout deal. They worry that the bailout could collapse, toppling Greece's economic and banking system and forcing the nation from the eurozone.

Should that happen, larger governments in Spain or Italy that are struggling to ease their debt loads might soon fail. The eurozone itself could splinter. The result could be a global crisis to rival the one that followed the 2008 collapse of the investment bank Lehman Brothers.

Behind the turmoil is a growing realization that cost-cutting alone won't solve Europe's crisis. Europe's governments have begun to seek ways to energize the continent's economy. Yet when money is tight and borrowing costs are high, governments have little ability to quickly stimulate growth.

Speaking to business leaders before leaving for the G8 summit, British Prime Minister David Cameron warned Thursday that the eurozone must "make up, or it is looking at a potential breakup."

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