Thursday

20th Jan 2022

EU set for bruising G20 encounter with US

  • Eurozone ministers are against speeding up the rules for joining the single currency (Photo: European Community)

A new policy divide appears to be opening up between the EU and the US over the extent stimulus spending programmes should be used to combat the current global recession.

Speaking late on Monday evening following a three hour meeting of eurozone finance ministers, the group's president, Jean-Claude Juncker, signalled that the recent US call for a global spending boost in 2009 was in direct contrast to what eurozone finance ministers considered appropriate.

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"The 16 euro area ministers agreed that recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis was not to our liking," said Mr Juncker, evincing European government concerns that rising public debt is fuelling market concern over a possible sovereign default.

"We would not want to give the impression that we were considering implementing further recovery packages. Europe and the eurogroup have done what they needed to do."

Instead, member states intend to take a wait-and-see approach in 2009 before possibly embarking on further spending programmes in 2010 if necessary.

Mr Juncker's comments come a day after Barack Obama's top economic advisor, Larry Summers, told the Financial Times that the correct response to fight the recession was a co-ordinated global spending initiative.

"There's no place that should be reducing its contribution to global demand right now," he said. "The right macro-economic focus for the G20 is on global demand and the world needs more global demand."

The striking divergence between governments either side of the Atlantic is likely to mean heated debate when the two sides meet on 14 March for a meeting of G20 finance ministers and on 2 April at the G20 leaders summit.

The gloom continues

Both Mr Juncker and economy commissioner Joaquin Almunia, who also attended the euro group meeting, were pessimistic about the immediate economic forecast.

"There is no obvious indication that gives us any reason to believe that the situation is turning around," said Mr Juncker. "All the forecasts that we have available are extremely gloomy so this is a deep recession that we are going through."

For his part, Mr Almunia said that external demand from the United States and Japan had weakened considerably, meaning any recovery will take longer than previously anticipated.

Initial estimates provided by Eurostat last week indicate a fall in GDP for the euro area of 1.5 percent in the last quarter of 2008 compared to the preceding quarter, brought on by falling world trade volumes and a decline in domestic demand.

Euro group offers little prospect of accelerated entry

Despite the lack of good news coming from the eurozone these days, a number of central and eastern EU states, whose currencies have been buffeted by the economic downturn, have made calls in recent weeks for accelerated access to the monetary union.

But euro group finance ministers signalled their unwillingness to bend current accession stipulations that include a budget deficit below three per cent of national GDP and a stable currency exchange rate relative to the euro for two years prior to accession.

"There is no question of reducing the rules for joining nor is there any question of reducing ERM-II from two years to one year," said Mr Juncker.

Romania is keen to join the euro area in 2014 but the extent of the state's financial difficulties were made apparent on Monday when the IMF announced representatives would fly to Bucharest in the coming days to discuss a possible joint funding package together with the EU.

"Once we have received the letter from the Romanian authorities asking us to negotiate the use of the balance of payments facility we will start these conversations together with the IMF," said Mr Almunia after the eurogroup meeting.

He added that any talks with the new Latvian government to renegotiate the terms of its EU/IMF loan would result in "difficult negotiations".

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