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Facing slow to no growth, EU's poor nations plot next move

ATHENS—Concerns that a north-south divide is erupting within the euro zone mount as leaders of six south European countries meet in Athens on Friday to discuss key issues of austerity and growth plaguing the region.

Besides Greek Prime Minister Alexis Tsipras, those attending are France's President François Hollande; Cyprus President Nicos Anastasiades; Italy Prime Minister Matteo Renzi; Portugal Prime Minister António Costa; Malta Prime Minister Joseph Muscat and Spain's State Secretary for the European Union, Fernando Eguidazu.

According to Greek government sources, the aim of the meeting of these Mediterranean EU countries is to boost cooperation and coordination so they can leave their mark on the European agenda.

Graffiti by street artist Jupiterfab, depicting Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel in Athens.
Giorgos Georgiou | NurPhoto | Getty Images
Graffiti by street artist Jupiterfab, depicting Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel in Athens.

The meeting will focus on EU foreign policy, with an emphasis on regional security and peace; improving economic growth by stimulating employment and attracting investment; and examining European policy with regard to the migration-refugee issue.

None of the leaders participating in the discussion are in a more advantageous position than the other.

Rome's economy stagnated between April and June, and GDP grew 0.7 percent in annual terms, which represented a deceleration compared to the 1.0 percent rise in the first quarter. This is the lowest quarterly growth figure since emerging from a three-year recession at the beginning of last year. The French economy has ground to a halt in the second quarter of the year, reporting zero growth. Greek GDP fell by 0.9 percent in the second quarter of 2016 on an annualized basis, showing an exacerbation of the recession in the crisis-plagued country. It's the fourth consecutive quarter with a GDP contraction.

Friday's meeting comes a few days after the Group of 20 (G20) Summit in Hangzhou, China, which focused on lackluster global economic growth. According to ECB estimates, euro zone GDP will grow annually by 1.7 percent in 2016, 1.6 percent in 2017 and by 1.6 percent in 2018. The G20 agreed that to jump-start a recovery, all measures should be used, including quantitative easing and skills training, international tax cooperation and focusing on innovation.

Standing against austerity

The concept of a united front of southern European countries was proposed in August by Greek Prime Minister Tsipras, seeking to enhance coordination and cooperation of Mediterranean EU member-states ahead of the informal European Council in Bratislava on Sept. 16.

"Our goal is not to create a group of countries based on division, said Tsipras in an interview with the French newspaper Le Monde on Sept. 9. He added, "We would rather promote a common approach among the countries of the European periphery and the Mediterranean, which, objectively, were the most affected by the crisis."

But this initiative is not new. In the 1980s the southern European countries teamed occasionally in support of a common agenda on critical European issues.

Former Greek socialist Prime Minister Andreas Papandreou had close cooperation with the former France President François Mitterrand in the 1980s as part of a network of the southern European socialist forces that developed after the fall of dictatorships in Greece, Spain and Portugal. These links were further developed across Mediterranean nations and functioned as a coalition within the EU and a check on the interest of northern states.

A Euro-Mediterranean partnership for fighting austerity in the euro zone was first attempted by the Greek leftist party Syriza before the general elections of January 2015 that brought it to power. At the time, Tsipras hoped Athens would attract the solidarity of Southern European countries against austerity and that those countries would stand by Greece in its negotiations with international creditors — expectations that turned out to be unrealistic.

In order to tame the euro zone sovereign debt crisis over the last seven years, the richer countries of Northern Europe have called for austerity measures and budget cuts, coupled with stronger EU sanctions for countries that do not adhere to this policy. In practice, this economic recipe, led by Germany, proved economically and politically disastrous, as it fueled the recession and nourished populism. In some cases it has become increasingly difficult for political parties to pursue an economic agenda that deviates from these fiscal norms without questioning EU membership.

Tspiras and his colleagues believe the current situation in southern Europe makes this a good time to address austerity issues and its effect on long-term growth throughout the region. The stars may be aligning, considering in Italy a referendum on constitutional reform will take place between Nov. 15 and Dec. 5 and the first round of the presidential election in France next April.

This may help the Greek prime minister's cause, which is to convince its lenders that the targeted 3.5 percent primary surplus for 2018 is too high and would negatively affect crisis-stricken Greeks. Terms of the Greek bailout program assumed that tax revenues would exceed program spending, ex-interest on outstanding debt. But within the southern EU bloc, many believe this is an unrealistic target for an aching economy that for seven years has been in a recession and austerity mode.

Tsipras does not want to give the impression that he does not respect the agreements with Greece's creditors. In an informal government meeting held on September 6, Tsipras asked his ministers to progress rapidly with the fiscal and structural measures that Greece's lenders set as a prerequisite last June. This effort comes ahead of a mandated second review of its current international bailout, which the Greek government is expected to start in October and which includes controversial reforms. In turn, lenders have promised that the European Stability Mechanism, the EU's bailout fund, will outline how it will offer Greece debt-relief measures.

The austerity measures in southern European nations create the conditions for dividing the EU further, as the Germans and their northern allies insist on tight budgets, despite the persistent deflation in the region and weak growth.

On September 8, ECB President Mario Draghi said fiscal policies in the euro zone should also support the economic recovery, while complying with the fiscal rules of the European Union. "All countries should strive for a more growth-friendly composition of fiscal policies," he said in a press conference in Frankfurt, and he added, "Countries that have fiscal space should use it. Germany has fiscal space."

This message was addressed to the German Finance Minister, Wolfgang Schäuble. On Sept. 6 in the House of Representatives, he presented his 2017 election-year budget as an anchor of stability in unsettling times, pledging to uphold fiscal restraint while saying Europe's biggest economy is in its best shape ever. But the prosperity of Germany does not mean prosperity for the rest of the 18 members of the euro zone.

— By Nasos Koukakis, special to CNBC.com