EU finance ministers to tackle recession threat

As the euro declines to a one-year low against the dollar, EU finance ministers are set to meet in Nice to discuss what measures can be taken to avoid a European recession. Meanwhile, the EU internal market commissioner has warned Europe is not ready for a cross-border US-style banking collapse.

On Thursday (11 September) the euro dropped to its lowest level in 12 months to 1.3893 dollars amid fears that Europe is sliding towards a technical recession, defined as two consecutive quarters of contraction. The euro has fallen 1.9 percent this week.

At an informal two-day get-together in the south of France, the ministers are to analyse the current economic situation in Europe and consider how the EU member states should collectively respond to the spreading global economic malaise, born of the ongoing US financial crisis.

On Wednesday, the EU economic affairs commissioner Joaquin Almunia admitted that the global financial turmoil has caused more trouble for the EU economy than Brussels had initially believed.

"The financial turmoil and the external shocks have provoked in the European economies a sharper than expected slowdown," said the commissioner.

Presenting an interim economic review, the commission trimmed its earlier GDP forecasts for the year, with Mr Almunia predicting a recession in Germany, Spain and Britain.

The eurozone contracted 0.2 percent in the second quarter, and Mr Almunia believes the 15-member-state region will not see any growth in the third quarter.

Economists do not expect the European Central Bank, bound by the treaties to focus on the battle against inflation, to take a page from its counterparts in the US and Japan and cut interest rates any time soon, leaving any stimulus measures in the hands of member states.

However, the EU's tight public deficit controls, and most member states' restricted available funds, limit the room to develop new spending programmes or to cut taxes.

Heading into the meeting, both the German finance minister, Peer Steinbrueck, and French Prime Minister Francois Fillon said they were opposed to any package of stimulus measures.

The ministers will however look at how the European Investment Bank can aid small and medium-sized businesses, and debate the merits of lowering value-added taxes.

EU not ready for banking collapse

The meeting will also cover EU monitoring of banks and other financial groups that operate across borders within the union.

Glancing across the Atlantic, ministers are fearful that the string of collapses of financial institutions in the US could spread to Europe, but where so far they have been contained by centralised US authorities, the patchwork of arrangements across Europe leaves the bloc vulnerable in the case of the collapse of a bank that operates in more than one member state.

Yesterday, EU internal market commissioner Charlie McCreevy warned Europe was not prepared in the event of a cross-border bank going belly-up.

"Let's imagine the failure of a cross-border bank. Are co-operation arrangements between ministries of finance, central banks and supervisors fit for purpose?" he said at a financial conference ahead of the finance ministers' meeting.

"All member states operate some form of early intervention mechanism in order to handle a crisis in an ailing bank. But the nature of the measures differ across member states," he added.

"Such differences have the potential to complicate or impair efficient cross-border crisis handling."

Member states however are loath to consider any centralisation of banking regulation at the EU level.