European stocks advance as Spain makes bigger cuts

By PAN PYLAS AP Business Writer

LONDON (AP) - European stock markets and the euro advanced Wednesday after Spain unveiled new spending cuts which helped offset worries about the continent's debt crisis. Britain's financial markets meanwhile gave a lukewarm response to the establishment of the country's first coalition government since World War II.

Solid German economic growth figures - Europe's biggest economy expanded by a modestly higher than expected 0.2 percent in the first three months of the year - also helped fuel the rally, particularly in Frankfurt, where the DAX was up 102.85 points, or 1.7 percent, at 6,140.56.

The CAC-40 in France was 24.15 points, or 0.7 percent, higher at 3,717.35.

Better than expected growth in Germany also helped relieve pressure on the euro - by early afternoon London time, the euro was trading 0.3 percent higher at $1.2677.

However, the euro's medium-term fortunes are likely to depend on the debt crisis that has already seen Greece bailed out by its partners in the eurozone and the International Monetary Fund, and forced European policymakers to unveil a euro750 billion financial support package for the single currency zone.

The news that Spain aims to cut its budget deficit by a further 1.5 percentage point to 6 percent of the country's gross domestic product in 2012 has also helped calm jittery markets.

Spain's Prime Minister Jose Luis Rodriguez Zapatero outlined a raft of measures includes cuts in public sector pay.

"Today's Spanish budget is a positive step towards a return to fiscal health in the eurozone, said Jane Foley, research director at Forex.com.

Policymakers across the eurozone face a difficult balancing act over the coming months - sustaining growth at a time when big budgetary cutbacks are being enacted.

Figures from Eurostat, the EU's statistics office, did little to encourage hope that the eurozone economic recovery is gathering a head of steam - the 0.2 percent quarterly increase across the 16-country bloc hid big disparities. Greece contracted another 0.8 percent even before the government has enacted the bulk of its austerity measures - spending cuts and tax increases that will further weigh on growth in the short term.

"The main concern for the euro countries will be restoring confidence in their fiscal positions, while keeping the impact on economic growth to a minimum," said Jorg Radeke, an economist at the Center for Economic and Business Research.

Britain's financial markets were more interested in the new government following five days of uncertainty - after bouncing back strongly on confirmation that the Conservative Party had tied up a deal with the Liberal Democrats, both the pound and stocks were trading way down from earlier highs.

The FTSE 100 index of leading British shares was up 12.19 points, or 0.2 percent, at 5,346.40, down on its early session high of 5,379.18, while the pound was trading flat at $1.4934, having earlier struck a high above $1.50

"While this dramatic political conclusion has that finish-line feeling in the wake of five days' intense wrangling, investors will be acutely aware that this is, in some respects, only the beginning," said David Jones, chief market strategist at IG Index.

"The coalition will no doubt aim to present a united front on economic policy, but it wouldn't be surprising to see cracks start to show and doubt cast over exactly how - and to what extent - issues such as the deficit will be tackled," Jones added.

As the new government was taking shape, the Bank of England's governor Mervyn King hinted that the British economy may need some further support - possibly involving further asset purchases by the central bank - over the months ahead for the recovery to become fully entrenched.

Speaking after the publication of the Bank's quarterly economic projections, King warned that the downside risks to economic growth have increased in the wake of government debt crisis gripping Europe in particular - and that's even before the coalition government has outlined its first raft of spending cuts, expected in an emergency budget statement from the new finance minister George Osborne within 50 days.

Wall Street was poised to open modestly higher later - Dow futures were up 39 points, or 0.4 percent, at 10,748 while the broader Standard & Poor's 500 futures rose 5.6 points, or 0.5 percent, to 1,157.80.

Earlier in Asia, stock markets were mixed.

While Japan's benchmark Nikkei 225 stock average shed 17.07 points, or 0.2 percent, to 10,394.03, Hong Kong's Hang Seng index gained 0.3 percent to 20,212.49 and stocks in mainland China rose 0.3 percent.

There was little excitement in the oil markets, where benchmark crude for June delivery was trading 1 cent lower at $76.36 a barrel in electronic trading on the New York Mercantile Exchange. The June contract fell 43 cents to settle at $76.37 on Tuesday.

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Associated Press Writer Alex Kennedy in Singapore contributed to this report.