21 Jan, 2009

EU’s Collective Effort to Ease Financial Crisis Dealt Blow

EU finance ministers vowed to lower their growing national deficits after recession-hit economies improve, but the politicians did not call for implementing binding deadlines to fight the debts. “A crisis that arose out of (too much) debt cannot be fought by creating more debt over the long term,” Austrian Finance Minister Josef Proell told reporters in Brussels on Tuesday, Jan. 21. European governments are spending billions in response to one of the worst global recessions in hopes of boosting national economies even as tax income shortcomings threaten larger than expected budget deficits. Czech Finance Minister Miroslav Kalousek, whose country currently holds the rotating EU presidency, said there was unanimous agreement that bringing down deficits must be a priority when their economies pick up. “All members said that they should return to fiscal consolidation as soon possible,” Kalousek said. “The question is how long will this take.” Finance ministers gave British plans to insure toxic assets a lukewarm reception after being briefed on the plans by British Chancellor Alistair Darling. But responding to the credit crisis “in a coordinated fashion does not mean that all countries will choose the same instruments,” Kalousek said, adding that the British plan contained “lots of interesting ideas.” The centerpiece of Darling’s plan, launched soon after Royal Bank of Scotland (RBS) announced possibly the biggest losses in British corporate history, involves a massive insurance scheme to protect banks from so-called toxic assets. Germany remains skeptical of British plan German Finance Minister Peer Steinbrueck expressed “skepticism” at the plan, which Britain has hailed as a model for Europe. But it elicited a more favorable response from European Economic and Monetary Affairs Commissioner Joaquin Almunia. “The measures announced by the UK government are very interesting. There are aspects that deserve further and immediate discussions,” he said, adding that the European Commission would soon be providing guidance to EU member states on how to dispose of bad assets. There was, however, no disagreement on the fact that European financial markets have yet to fully recover from the global credit crisis, which reached its apex with the collapse of US investment giant Lehman Brothers in September. “The situation now is clearly better than two or three months ago,” Almunia said. “But we all agree that the functioning of credit flows is not adequate. This is a matter of priority.” Shortage of credit is one of the underlying causes of the deep and prolonged recession which Europe faces this year. Gloomy news from Brussels for 2009 On Monday, the European Commission issued fresh economic forecasts predicting a 1.8 percent drop in the EU’s gross domestic product (GDP) in 2009. GDP in the 16-member euro zone, which excludes many fast-growing countries from eastern Europe, is set to shrink by 1.9 percent. Discussions in Brussels focused on the implementation of the various economic recovery plans that have so far been put together by national governments. Officials in Brussels say 18 such plans, totaling some 190 billion euros ($250 billion) over the next two years, have so far been submitted to the European Commission. By far the biggest stimulus package — 82 billion euros spread over 2009/10 — belongs to Germany, the bloc’s largest economy. At their meeting, ministers agreed on the need to accompany such temporary measures with structural reforms designed to improve Europe’s long-term competitiveness and that any stimulus programs adhere to the bloc’s competition and state aid rules. Optimistic talk in the face of expected breach of rules While acknowledging that budget deficits would likely breach EU rules as a result of increased public sector spending during the downturn, ministers said they remained “fully committed to sound and sustainable public finances.” Spain and Greece have already had their credit ratings cut over the worrying state of their public finances, with experts predicting Portugal and Ireland may soon suffer similar downgrading. Ministers also formalized a 3.1 billion-euro ($4.1 billion) loan to Latvia designed to help the Balkan country cope with the global credit crunch. The EU loan, which had already been approved in principle by EU governments, is part of a 7.5 billion euro balance of payments support package which includes assistance from the International Monetary Fund, the World Bank and individual countries such as Denmark, Norway and the Czech Republic. (credit: www.dw-world.de)

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