EU leaders try to talk their way out of recession (AP)
12.09.2008 14:05 Business
German Finance MinisterPeer Steinbrueck, who manages the EU's biggest economy, told reporters on the way into the two-day meeting that a major spending program would also be a bad idea for Germany and he preferred economic reforms to make the country more competitive.
But other EU governments are already planning to spend billions to boost sluggish growth or readying themselves to deepen debt as tax revenues fall and job lines lengthen — although so far only Italy is calling for an EU-funded bank to spend billions on infrastructure projects.
Spain this week announced a $4.3 billion ($3 billion) credit line for the construction industry, hit hard by tumbling house prices as an overheated economy crashes. France last year launched a program of tax cuts that hit growth — and will likely worsen its deficit.
French Finance Minister Christine Lagarde, who will lead the talks, said ministers "very clearly have to concentrate on growth."
Many officials are still refusing to use the word "recession." It's "a sharper-than-expected slowdown" to the European Commission and a "depressed episode" to European Central Bank PresidentJean-Claude Trichet.
But it's definitely a looming recession for Germany, Spain and Britain, according to EU forecasts this week, with their economies expected to shrink for two consecutive quarters. France and Italy may stagnate, hardly a relief for two countries that never sped up during the recent boom.
Trichet, speaking late Thursday, insisted that the bank's main aim was to battle "an inflationary challenge of first magnitude" as soaring fuel and food prices boost costs for companies and force people to pay more for the things they can't do without.
The ECB hiked interest rates for the first time in a year in June, raising them from 4 percent to 4.25 percent, to try to contain record-high inflation — even though more expensive borrowing costs can cool economic growth.
For European governments, slowing growth rather than inflation is their main preoccupation. It is forcing them to change spending plans and may see many of them turn back on a pledge made last year to reduce budget deficits — choosing instead to pile on debt next year.
That reverses a major recent effort to bring the 15 euro economies in line and stabilize their shared currency by bringing yearly budget deficits under a limit that all of them met for the first time this year — ten years after the euro launched. Many countries will claim they have few other choices open to them.
But for EU officials, the cause of current economic woes mostly lie outside Europe and the medicine they prescribe is the same dose they've tried to offer governments for years: pay off debt, open up to more competition, reform labor markets and social spending.
That might help tackle deeper problems but won't solve Europe's short-term challenges. The euro has been strong because the U.S. dollar has been weak — hurting European exports to its biggest trading partner, the United States.
There is some relief in sight as the euro sinks and oil prices tumble but there's also plenty of gloom on the horizon. A world economic slowdown would hit one of the bright spots for the European economy: strong exports to emerging economies such as China, Brazil and Russia.
At the same time the global credit crisis that helped trigger Europe's slowdown is not easing as quickly as hoped. Ministers will discuss how they can fireproof Europe's banking sector, ease credit conditions and step up supervision for banks that operate in several different countries.
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Associated Press writers Emma Vandore and Barbara Schaeder in Nice contributed to this report.
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