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Europe lays out bold plan to save euro: Can it avert global recession?

The nations of the European Union have agreed to submit to tighter oversight of fiscal policies as many struggle with severe debt that could kill the euro and cause a new global recession.

By Staff writer / December 9, 2011

Specialists work at their on the floor of the New York Stock Exchange during the IPO of Rose Rock Midstream Friday. US stock indexes rose in early trading after 26 European nations agreed to consider tying their economies together more closely in hopes of preventing a debt crisis and global recession.

Richard Drew/AP

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A move by European nations to more closely unite their fiscal policies sent stock markets higher Friday as it raised hopes that attempts to address the continent's debt crisis won't devolve into chaos.

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The agreement, while significant, isn't a one-step roadmap for ending the euro zone's debt crisis, however. And it doesn't resolve a vital question for the rest of the world: Could the challenges in Europe result in a global recession next year?

The core challenge for the US as well as Europe is how to grow while households and governments are basically in retrenchment mode – tempering their spending after years of fast-rising debt.

For now, many economists are forecasting tepid growth globally, but with recession in Europe and some significant uncertainty elsewhere.

"We project that the global expansion will continue, albeit at a below-average pace," economists at Wells Fargo write in an outlook released this week. But they add that this forecast hinges on no deepening of troubles in the euro zone, "and the probability of another global financial crisis that emanates this time from Europe is not insignificant."

In the accord reached Friday, most European Union nations pledged to work toward a new EU treaty to demand greater fiscal discipline. Nations would face penalties for running up deficits. 

The deal also provides for an expanded bailout fund for member nations such as Ireland that have faced investor doubts about their solvency. 

In the short run, one key result of the deal is simply to keep hope alive that the debt problems can be addressed in an orderly way. It suggests that the European Central Bank (ECB) will provide a backstop to prevent a panic over whether high-debt nations like Italy might have to default, which would be a catastrophe for the private-sector banks that hold their debts. 

"The main purpose of this deal is to ensure that the ECB will be given the comfort it requires" to offer such aid, Willem Buiter, chief economist at Citigroup, wrote earlier this week. But he predicted that ECB support will not be open-ended, and "will be revealed one intervention at a time, over a period of months – possibly years."

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