G8 leaders to focus on Europe's woes

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Graphic map showing key areas of the world under discussion at the G8 meeting.

Leaders of the world's most powerful nations were to focus their attention on Europe's economic woes Saturday after President Barack Obama threw his weight behind French calls for more pro-growth policies.

Obama set the stage for a fractious G8 summit here by forging an alliance with new French President Francois Hollande over the need to jolt Europe back to growth.

Fearing Europe's economic crisis is poised to worsen -- with dangerous repercussions for the US economy and perhaps his chances of re-election -- Obama weighed in, risking the ire of German Chancellor Angela Merkel who has championed an austerity-first approach.

Shortly before welcoming Merkel and other leaders to the famed presidential retreat outside Washington, Obama noted Friday that events in Europe held "extraordinary" importance for the United States.

The G8 needs to discuss "a responsible approach to fiscal consolidation that is coupled with a strong growth agenda," he said.

To kick-off the summit a tie-free Obama greeted leaders shortly after dusk Friday at the threshold of his wood cabin for an informal dinner that lasted more than two hours.

But the dressed-down atmosphere did little to relieve tensions, which have been stoked by the belief that two years of painful cuts demanded by Germany and others have undercut Greek growth and made recovery more difficult.

In what may have been a telling moment, Obama greeted Merkel at his Laurel Lodge with a cordial: "How've you been?" When her response came: a shrug and pursed lips, Obama conceded: "Well, you have a few things on your mind."

Publicly European leaders have attempted to smooth over the splits within the G8, insisting austerity and stimulus need not be mutually exclusive.

"We need to take action for growth while staying the course in terms of putting our public finances in order. Stability and growth go together, they are two sides of the same coin," European Commission chief Jose Manuel Barroso said ahead of the summit.

But with Greece's fiscal crisis apparently approaching denouement, those good words may be sorely tested.

The recent clobbering of Greek parties that back austerity measures under the country's 173-billion-euro ($220 billion) bailout has sparked a fresh round of market panic and left the two-year-old effort to prevent a Greek default on life support.

Fresh Greek polls are scheduled for June 17, but there is no certainty that supporters of the painful reforms will win, and already nervous Greeks have been pulling money from bank accounts.

The markets are already betting that if anti-austerity parties win the rest of Europe will turn off the bailout spigot, a decision that would force a Greek default and would likely spell an exit from the eurozone.

So far, European leaders are insisting that Greece must meet its commitments, a stance that will likely be held until the elections. But a row is brewing over whether Greece's bailout package needs to be revisited.

Two years of austerity have resulted in crippling unemployment and while Greeks say they are overwhelmingly in favor of staying in the eurozone, there is little appetite for more budget cuts.

Diplomats say major new initiatives are unlikely to come from the G8 summit, but Obama's intervention tips Europe's political calculus toward pro-growth policies before European officials gather in the coming weeks to thrash out concrete measures.

Commission president Barroso said there was growing consensus around the idea of specific investments funded by common European bonds -- a measure he said would satisfy the need for austerity and stimulus.

"We need to compliment the fiscal consolidation efforts for reforms with investment," he told AFP on the margins of the summit.

G8 leaders will hold their main discussions on Europe's fiscal plight Saturday at Camp David's rustic collection of cabins in the wooded Catoctin Mountains in Maryland, outside Washington.

Friday night's dinner discussions focused heavily the ongoing bloodshed in Syria and Iran's contested nuclear program ahead of talks between global powers and the Islamic Republic in Baghdad later this month.

According to a senior US official there was broad agreement on the need for political transition in Syria, where a revolt and government crack down has left 12,000 dead.

But as UN weighs sending more military observers to the country, it was not clear whether Russia and the rest of the G8 had bridged differences over the fate of Bashar al-Assad's regime.

There was also discussion about North Korea, which is feared will launch a new nuclear test and Myanmar, after Obama eased US investment restrictions Thursday.

Diplomats said the weekend would also see an agreement on how to help newly free Arab nations recover state assets moved abroad by members of previous regimes.

The G8 club of developed nations includes Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.

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