Europe's finance ministers have become more pessimistic about the outlook for the European economy and now believe it's "highly uncertain" the much-predicted recovery in 2010 will materialize, according to an internal paper prepared by ministers for the European Union summit on March 19, German business daily Financial Times Deutschland reported on Tuesday.
Construction workers in Berlin. The EU is growing more pessimistic about its economic outlook.
In mid-January, EU Monetary Affairs Commissioner Joaquin Almunia had forecast that the economy would start to improve in the second half of 2009. But many economists now believe that the economic crisis will be far worse and last longer than expected.
Europe's economies are being hit by negative growth, historically low business and consumer confidence and faltering credit cycles, the document says. "Negative spirals between the real economy and the financial markets are worsening the situation," it adds, according to Financial Times Deutschland.
"All forecasts available are extremely gloomy. This is a deep recession, deeper than at the beginning of the 1990s," Jean-Claude Juncker, who is Luxembourg's prime minister and finance minister, told reporters on Monday. Juncker is chairman of the 16 finance ministers from euro zone, which consists of the states that have adopted the euro single currency.
The European Commission predicted on Jan.19 that the euro zone economy would shrink 1.9 percent this year. The European Central Bank, however, forecast last Thursday the contraction could be between 2.2 percent and 3.2 percent.
Nevertheless, the EU has rejected an appeal from the US government to launch additional economic stimulus packages. "We're not prepared to increase the economic programs," Juncker said. Stimulus measures undertaken so far should first be allowed to take effect, he added.
The senior economic advisor to US President Barack Obama, Lawrence Summers, had urged Europe in a newspaper interview on Monday to pump more money into the economy to keep on boosting domestic demand and help lift the world out of recession.
The EU states have spent around 3.3 to 4 percent of their combined economic output to kick-start economic growth. In January Germany introduced a €50 billion ($63 billion) program, its second since the crisis escalated in late 2008. German Finance Minister Peer Steinbrück also rejected further measures. "We should concentrate on the measures that have already been decided," he said on Monday evening.
Despite the worsening outlook, the finance ministers plan to set a timetable for reducing their national budget deficits, with most planning to start consolidating in 2010, according to Financial Times Deutschland. That will help prevent financial markets from punishing highly indebted governments by imposing higher risk premiums on their government bonds
However, the document adds that countries with especially high budget deficits should be allowed longer grace periods to reduce the deficits. This is aimed at countries such as Ireland, which is expected to post a deficit of almost 10 percent of gross domestic product (GDP) in 2009, almost three times higher than the 3-percent limit set by EU rules.
Criticism of EU's Crisis Management
The EU finance ministers are meeting in Brussels on Tuesday to discuss cuts in sales tax for certain sectors and to agree on long-term economic and budget plans for a number of EU countries, including Germany.
The German government expects a budget deficit of 4 percent of GDP for 2010, but plans to reduce it back below the 3-percent limit in 2012.
But not everyone's happy with the EU's crisis management. The managing director of the International Monetary Fund, Dominique Strauss-Kahn, accused the EU of poor coordination in tackling the downturn.
"When the EU finance ministers sit together they always agree that one has to take quick and aggressive action to rescue the banks. But when they go back home the process suddenly becomes very slow, much too slow in my opinion," Strauss-Kahn told German daily Süddeutsche Zeitung in an interview published on Tuesday.
"The coordination on a European level isn't especially good even in good times, but when times are bad it's really bad," said Strauss-Kahn. "They all still try to find national solutions. But there are no national solutions to a global crisis. Everything is going too slowly at the moment. The crisis in Eastern Europe is getting worse from day to day."
He also warned that banks around the world may face further losses as not all risks have been located yet. So far, all that was known was the losses would add up to a "large sum," he said.
Help for Romania
Separately, the European Union said it was ready to negotiate financial aid for EU member Romania to support its troubled economy. The aid is to come from a special EU fund that has already been tapped by Hungary and Latvia.
"They (Romania) are interested in the cooperation we had with Latvia and Hungary," EU Commissioner Almunia told a news conference after Monday's meeting of finance ministers.
Hungary and Latvia have received €6.5 billion from the fund and Latvia €3.1 billion as part of wider aid packages backed by the International Monetary Fund (IMF) after they suffered sharp declines in their currencies as well as their bond and stock markets.
Many investors have been reducing their investments in Central and Eastern Europe because they fear the region may be hit especially hard by the financial crisis.
"We will need to have conversations with the Romanian authorities, with the IMF. We will need to estimate financial needs and establish a list of conditions," Almunia said.
The IMF and the EU have asked Hungary and Latvia to tighten their fiscal policies as a condition for the loan. Such a demand could lead to protests in Romania, where workers have already demonstrated against hardship caused by the crisis.
cro -- with wire reports
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