Recent turmoil on financial markets is threatening economic recovery in the European Union, the union’s leading economic official said today.

The warning from EU Monetary Affairs Commissioner Olli Rehn came after a turbulent summer for markets across the globe, as investors worried about a potential new recession in the United States, the eurozone’s ability to resolve its debt crisis and the health of European banks.

“The financial markets and the real economy move now more in synchrony, which makes me seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy,” Mr Rehn told European politicians.

That statement is a sharp turnaround from comments in recent months, when he said growth in the EU was strengthening despite the market jitters.

As a result, the European Commission now has a bleaker view of economic growth in the EU than this spring, Mr Rehn said, adding that a new forecast will be released on September 15th. This spring, the commission, the EU’s executive arm and economic watchdog, predicted the 27-country union would grow 1.8 per cent this year.

The European Parliament’s economic affairs committee had called Mr Rehn, as well as the head of the European Central Bank, Jean-Claude Trichet, and Eurogroup chairman Jean-Claude Juncker, to an emergency hearing on the euro zone’s recent problems.

Investor concerns over the currency union have been worsened by delays in implementing a recently agreed second bailout for Greece as well as changes to the euro zone’s bailout fund.

Euro zone countries have been locked in discussions over a demand from Finland to receive collateral to secure its contributions to the new Greek rescue package.

Mr Juncker, the prime minister of Luxembourg who also chairs the meetings of euro zone finance ministers, said the collateral issue won’t scupper the bailout deal and that he expected a solution within days or weeks.

“The Eurogroup is working on a proposal, which I hope all eurozone member states will be happy with,” he said.

Mr Trichet called on governments to rapidly implement measures agreed to tackle the debt crisis.

"The full and timely implementation of the July 21st agreement between heads of state or government is of essence," Mr Trichet said in a statement to European parliamentarians in Brussels.

Uncertainty remained particularly high in the context of the euro zone's debt crisis and weakened economic prospects in the United States, he added.

The ECB is reviewing the risks to price stability, he said, suggesting the bank could tone down its view on inflation pressures.

While Mr Trichet said the ECB expected inflation to remain above 2 per cent in the months ahead, he avoided saying there were "upside risks to price stability" - language he used after the bank's last monetary policy meeting on August 4th.

"Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September," Mr Trichet said.

A downward revision in the ECB's view of the threat posed by inflation would relieve any pressure for it to follow up the two interest rate rises it has made this year with another hike.

Annual inflation Europe's powerhouse economy Germany eased to 2.3 per cent in August, data showed today, giving the ECB one more reason not to hike borrowing costs any time soon.

In its last staff projections, released in June, the ECB forecast euro zone inflation in a range of 2.5-2.7 per cent this year and 1.1-2.3 per cent in 2012.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 per cent chance that the bank may be forced to cut rates early next year.

Reuters