Obama presses ailing Europe to focus on growth

CAMP DAVID, Maryland (Reuters) - A growing chorus of world leaders on Friday pushed for a shift toward more pro-growth policies to help ease a European crisis that threatens to oust Greece from the euro zone and reverberate throughout the global economy.

Setting the tone for a weekend G8 summit, President Barack Obama aligned himself with the new French president's drive for more economic stimulus in recession-plagued Europe, in a swipe at the tough austerity programs that have been spearheaded by German Chancellor Angela Merkel.

Obama's stance reflects his worries that the euro zone contagion, which threatens the future of Europe's 17-nation single currency, could hurt the fragile U.S. economic recovery and his own re-election chances in November.

The Camp David summit kicked off four days of intensive diplomacy - including a NATO meeting in Obama's home town of Chicago - that will test leaders' ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

After White House talks with French President Francois Hollande, Obama said the two agreed that tackling the euro-zone crisis was "an issue of extraordinary importance, not only to the people of Europe, but also to the world economy."

"We're looking forward to a fruitful discussion later this evening and tomorrow with the other G8 leaders about how we can manage a responsible approach to fiscal consolidation that is coupled with a strong growth agenda," Obama said before flying to Camp David and greeting fellow leaders for an opening dinner.

Merkel, who has insisted on the need for tough fiscal discipline to bring down suffocating debt levels even as angry voters have toppled some euro zone governments, seemed certain to find herself increasingly alone.

As Obama welcomed his guests one-by-one outside a rustic lodge at the presidential retreat in Maryland, he asked Merkel: "How have you been?"

She shrugged and offered a strained smile. "Well, you have a few things on your mind," he said in a brief exchange captured by a boom microphone.

Her predicament could be underscored in the summit's final communique that, according to a draft shown to Reuters, will stress "our imperative to create growth and jobs."

GREECE MUST "MAKE UP THEIR MINDS"

Reflecting growing frustration as Greece's post-election turmoil shakes global markets, British Prime Minister David Cameron called on euro members for decisive action and said the Greeks must "make their minds up" whether to stay in the euro zone.

No major economic policy decisions are expected from the talks but Obama will urge the Europeans to work harder at forging a comprehensive approach to their debt troubles.

World stocks fell to levels below where they began the year, depressed by the prospect that a Greek euro exit would spread upheaval in the currency bloc and engulf much larger economies such as Spain's.

The European Union's trade commissioner said for the first time that European officials were working on contingency plans in case Greece bombs out of the euro zone.

While Obama and Hollande found common ground on economics, their meeting also showed differences over France's commitment to the NATO military mission in Afghanistan, which will be the focus of the alliance's summit in Chicago starting on Sunday.

Hollande, a socialist sworn in this week as president, told Obama he would stick by his campaign pledge to withdraw French combat troops from Afghanistan by year's end, earlier than the alliance's 2014 timetable. But Hollande said France would continue to support the NATO effort in a "different way.

U.S. officials hope to convince Hollande to rethink the French pullout plan.

GERMANY 'QUITE ISOLATED'

But the two leaders, meeting for the first time since Hollande's election victory earlier this month, were more in sync on the euro zone crisis.

Hollande said he spoke to Obama about the need to put a priority on growth, and that they also agreed it was important to find a way for Greece to stay in the euro zone.

Obama's administration spent heavily to try to tackle the 2007-2009 U.S. recession, and has long urged Europeans to do more to boost growth. Hollande is seeking to take the edge off austerity with more job-creating infrastructure investments.

Like Cameron, Canadian Prime Minister Stephen Harper has been a frequent critic of euro zone G8 members' handling of their debt woes. Italian premier Mario Monti was calling for growth measures even before Hollande did.

That could leave Merkel, who has used Germany's status as Europe's biggest economy to pressure others to keep a tight rein on debt, cutting a lonely figure at Camp David.

"Germany is absolutely quite isolated," said Domenico Lombardi, a former International Monetary Fund official who now is a senior fellow at the Brookings Institution think tank.

Lombardi said that while Germany had the upper hand when controlling debt was the focus, "it is now clear that Greece has become a systemic crisis" and this must now become the center of the debate.

A SOFTER APPROACH

While Merkel wants Greece's continued membership in the euro zone tied to Athens meeting tough austerity measures laid out in its bailout program, Hollande was seeking a softer approach.

Hollande also said he favors Europe recapitalizing Spain's troubled banks, which would mark a significant shift toward Europe taking over wider responsibilities from individual nations.

Backing calls for a concerted effort to boost economic activity, Jose Manuel Barroso, president of the European Commission, said there was a need to promote growth while putting public finances in order and this should be center stage at the summit. He insisted, however, that "we want Greece to stay in the euro area."

The G8 summit comes as Greeks are pulling cash from banks amid growing fears about its euro zone membership. Financial markets are deeply concerned about the future of the entire currency zone, with Spain's banking sector also under pressure.

Nearly two thirds of Greeks voted on May 6 for parties of the radical left and far right which oppose the austere terms of an EU/IMF assistance program. Talks failed to avert a repeat election, which is now set for June 17.

The "balanced approach" that Obama is pushing for in the euro zone is similar to his domestic efforts combining short-term stimulus and longer-term cuts to try to heal the U.S. economy and stoke hiring that has not recovered from the financial crisis. But the U.S. economy continues to struggle, posing problems for Obama's re-election.

Mitt Romney, the presumptive Republican nominee to face Obama in the November 6 election, has made reducing the U.S. debt load, which has escalated during Obama's tenure, one of his key campaign messages.

Also on the G8 agenda will be the price of oil. Obama may secure support to essentially pre-authorize a release of strategic oil reserves later this summer, just as U.S. and European sanctions on Iran come into force -- this despite Brent crude hitting a 2012 low on Friday.

While the secluded Camp David setting discouraged protests nearby, an estimated 2,500 people demonstrated peacefully in a downtown Chicago plaza under the watchful eye of police, chanting mostly about economic issues that have little to do with the coming NATO summit.

(Additional reporting by Alister Bull, Jeff Mason, Caren Bohan, Stella Dawson, Elizabeth Pineau, Gleb Bryanski, and John Irish; writing by Matt Spetalnick; Editing by Mary Milliken and Christopher Wilson)

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