World leaders back Greece, vow to combat financial turmoil

CAMP DAVID, Maryland (Reuters) - World leaders backed keeping Greece in the euro zone on Saturday and vowed to take all steps necessary to combat financial turmoil while revitalizing a global economy increasingly threatened by Europe's debt crisis.

A summit of the G8 leading industrialized nations came down solidly in favor of a push to balance European austerity - an approach long driven by German Chancellor Angela Merkel - with a new dose of U.S.-style stimulus seen as vital to healing ailing euro-zone economies. But it was clear that divisions remained.

"We commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us," the leaders said in a joint statement issued at their meeting at the Camp David presidential retreat in Maryland.

The message sent by the summit hosted by President Barack Obama reflected his own concerns that the euro-zone contagion, which threatens the future of Europe's 17-country single currency bloc, could hurt the fragile U.S. recovery and his re-election chances in November.

In their final economic communique, the Group of Eight leaders endorsed calls to broaden Europe's focus to more pro-growth remedies and said: "We reaffirm our interest in Greece remaining in the euro zone while respecting its commitments."

It was unusual for the often-bland G8 communique to single out a relatively small nation. But fears that a political stalemate in Greece would lead to its departure from Europe's monetary union at unknown costs to the financial system and global economic stability have spooked markets.

Spain too has roiled markets by revealing huge bad loans in its banking system as it struggles to rein in its budget while facing recession.

Merkel, increasingly isolated by a French-led push for a more growth-oriented approach, sought to play down the differences, saying: "Solid finances and growth belong inseparably together and should not be put into contrast."

Obama, who has pressed Europe for more growth-boosting measures like those he pursued at home, used his closing statement to remind euro-zone leaders that the stakes were high and there could be "enormous" costs to the global economy if they failed.

"Growth and jobs must be our top priority," he said, reaffirming his view that Europe has the capacity to meet the challenge.

Marc Chandler, currency strategist at Brown Brothers Harriman, said: "It is significant that a group as weighty as the G8 backs Greece and reinforces the idea that Europe needs a strong union. It strengthens its hand."

In another move to shore up shaky global growth, the G8 leaders said they would monitor oil markets closely and stand ready to seek an increase in supplies if needed. While crude oil prices have declined by 10 percent over the past month, the threat of sanctions on Iran loom next month.

The G8 said the global economic recovery shows promising signs but "significant headwinds persist."

CASUAL SETTING, TENSE ISSUES

The mountain cabins at Camp David where a shirt-sleeved Obama hosted the G8 leaders contrasted with recent tense meetings in European capitals about a sovereign debt crisis that just keeps getting worse.

The economic communique endorsed a recent political shift away from the budget-cutting austerity that has been championed by Merkel and British Prime Minister David Cameron as the route to prosperity.

Instead it recognized a common need to combine budgetary discipline with a growth strategy. This strengthens the hand of newly elected socialist French President Francois Hollande before a crucial European Union dinner on Wednesday to discuss growth.

The euro zone crisis took another lurch downward late last week when Spain revealed huge losses in its banking system and partially nationalized Bankia.

Cameron, after an early morning gym workout with Obama, said he detected a "growing sense of urgency that action needs to be taken" on the euro zone crisis. London relies heavily on international finance and banking instability would strike a fresh blow to an economy already in recession.

"Contingency plans need to be put in place and the strengthening of banks, governance, firewalls - all of those things need to take place very fast," he told reporters.

European leaders seemed keen to stress that they would stand firm in protecting their banks, after news of escalating bad loans raised the specter that rescuing Spain's banks would crash the euro zone's fourth largest economy.

"We will do whatever is needed to guarantee the financial stability of the euro zone," European Union President Herman Van Rompuy said, using language that ended up in the statement.

Hollande suggested using European funds to inject capital into Spain's banks, which would mark a significant acceleration of EU rescue efforts. But there was no direct mention of Spain in the communique or any indication of action leaders would take to combat the financial stresses.

GERMANY SOFTENING ON AUSTERITY

There already were signs of a softening in Germany's austerity stance as the meeting began.

Germany's largest industrial union, IG Metall, struck its biggest pay deal in 20 years early on Saturday. The 4.3 percent pay increase, more than double Germany's inflation rate, will boost worker buying power in the euro zone's richest nation and lift consumption. That is something the United States has urged as a means to bolster overall growth throughout the world's second largest economic region.

In the G8 group photo outside the presidential log cabin, Obama also sought balance. He stood with the leaders of Europe's two largest powers - France and Germany - to his right and his left respectively.

G8 leaders also raised pressure on Iran over its nuclear program, which they suspect has military objectives, by committing to a common approach. They pledged to implement sanctions fully against Tehran and indicated they would act together to lower oil prices if needed.

"Our hope is that we can resolve this issue in a peaceful fashion that respects Iran's sovereignty and its rights in the international community, but also recognizes its responsibilities," Obama told reporters.

The Camp David summit kicked off four days of intensive diplomacy that will test world 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 the Camp David talks, Obama and several of the G8 leaders headed to his home town of Chicago where he will host a two-day NATO meeting at which the Afghanistan war will be the central topic.

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

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