EU finance ministers sought to reassure the public yesterday that the European economy could ride out the turmoil in financial markets caused by a liquidity crisis in the banking sector.
Emerging from talks last night, ministers issued a statement emphasising that world growth was "robust" and "economic fundamentals in the EU were strong". But they also concluded that the current financial volatility on world markets had "heightened uncertainties and downside risks" to economic growth forecasts.
President of the European Central Bank Jean-Claude Trichet refused to describe the current credit crunch as a crisis, preferring instead to use the term "correction".
But Luxembourg prime minister Jean-Claude Juncker, who earlier chaired a meeting of the Eurogroup of ministers, warned that the "worst may not be behind us". Ministers debated possible regulatory responses to the credit crunch, which is a product of difficulties in the US market for subprime mortgages. But there was consensus that there should be no immediate regulatory response and a period of reflection was necessary.
Ministers arrived at the informal meeting in Portugal to hear that the Bank of England had been forced to extend emergency loans to mortgage lender Northern Rock. There was broad consensus that central banks were acting appropriately by pumping billions of euro into the financial markets to increase liquidity.
"The ECB has acted and reacted in the best possible way," said Mr Juncker.
European economic and monetary affairs commissioner Joaquin Almunia also warned about the impact of the credit crunch. "We're all aware the risks of lower growth have increased," said the Spanish commissioner, who nevertheless stuck to a forecast showing only marginally lower growth forecasts for the euro zone this year when compared to the 2.7 per cent rise in GDP in 2006.
Meanwhile, EU officials delivered blunt messages to France and Italy over their public finances. Both states are preparing budgets for 2008 and are coming under pressure from Brussels to adhere to a recent agreement made this year in Berlin to balance their budgets by 2010. Italy continues to set a target of 2011, while France has warned its budget deficit may only be eradicated by 2012.
Mr Trichet said the ECB called for "full respect of the accord in Berlin" in April when all finance ministers attending the Eurogroup agreed to use the current period of strong growth in Europe to undertake structural reforms and cut their fiscal deficits. Mr Almunia said Italy "must also tackle its public debt", which he noted was the highest within the Eurogroup. Italy has exceeded the EU's 3 per cent of gross domestic product deficit ceiling for the last four years and last year's deficit of 4.4 per cent was the highest since 1996.
Italian economy minister Tommaso Padoa-Schioppa has always said the accord was not binding and Italy has declined to change its 2011 target. "What we are doing is very much in line with what we are seeing done in other countries," he said yesterday.
