Tuesday

19th Feb 2019

EU blames US spending for market turbulences

  • The EU economy is "well prepared to weather this situation," said Mr Almunia (Photo: EUobserver)

The European Commission has pointed to unhealthy public spending in the US as the main cause of the current global market turbulences and urged Washington to cut expenditure and boost savings, while praising Europe's own "solid and sound" economy and the positive effect of the common currency.

The topic dominated a regular meeting of EU finance ministers in Brussels on Tuesday (22 January), shortly after the biggest plunge of global stock markets since the terrorist attacks of 11 September 2001.

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While evidently concerned about the possible consequences for the region - mainly if there is a recession in the US, where most of Europe's exports are heading - both the finance chiefs and the commission were keen to avoid pessimistic statements.

"This is not about a global recession, but about the risk of a recession in the US, as during the last years, big imbalances have been created in the US economy - a big current account deficit, a big fiscal deficit, a lack of savings," said EU economy commissioner Joaquin Almunia.

Mr Almunia suggested that US policy-makers should tackle the current crisis with measures that would secure "reducing the external deficit and the fiscal deficit, and increasing domestic saving in the US both in the public and the private sectors."

He maintained that Europe's own previous reforms and pressure for cuts in public finances have paid off, leaving the fundamentals of the bloc's economy - in contrast to the situation across the Atlantic - as "solid and sound".

"So we are well prepared to weather this situation even if we cannot ignore the risk of our growth rates being affected by this turmoil," he added.

A similar message was echoed by several ministers and national capitals. "The last forecast shows that economic reforms that have been implemented in the EU increase the resilience of the European economy in trying to face such shocks," said Slovenia's finance minister Andrej Bajuk on behalf of the bloc's presidency.

German chancellor Angela Merkel also urged for calm, describing Europe as an "anchor of stability for the global economy."

But Berlin is expected on Wednesday (23 January) to announce a downward revision of the country's economic forecast in 2008 for the third time in less than a year, down to 1.7 percent from 2.5 percent last year.

A full and clear picture of the impact of the turbulences and recent development in the global economy is expected to emerge following the European Commission's quarterly preview, due to be unveiled in February.

"Everybody is concerned, but more than that, everybody is uncertain. We must wait to see whether the US government interventions will prove to be effective or not," Dutch finance minister Wouter Bos commented.

US makes a historic rates cut

Economists say the current trends reflect investors' distrust of US president George W. Bush's plan, presented last week, to boost the American economy and its potential to avoid a full-blown recession.

On Tuesday, the US Federal Reserve slashed interest rates from 4.25 percent to 3.5 percent - its biggest cut in 25 years - at an unscheduled meeting that came as a surprise and was interpreted as a last ditch attempt to prevent recession.

US officials praised the move as a sign that the country's economic institutions are keeping a tight rein on the situation, while most stock market indexes and commodities quickly gained ground after their earlier losses in response to the announcement.

The UK's FTSE 100 index closed 2.9% higher after falling more than 4% earlier. France's Cac also bounced back but Germany's Dax closed down 0.3%, the BBC reported.

In its fresh analysis to be published on Wednesday (23 January), the International Labour Office (ILO) predicts that "economic turbulence largely due to credit market turmoil and rising oil prices could spur an increase in global unemployment by an estimated 5 million persons in 2008."

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