Brussels, 12/09/2008 (Agence Europe) - Meeting at the informal Ecofin Council in Nice on Friday 12 September, the 15 Finance Ministers of the euro are agreed on a diagnosis on the economic situation and outlined a joint response to the slow-down in growth. “Member states reached a common diagnosis”: the slow-down in growth is “more pronounced that expected before the summer,” said Eurogroup President Jean-Claude Juncker following the meeting. (Juncker had just been re-elected, by a show of hands, head of this informal group for a further two years, on condition that he wins the national elections in Luxembourg next June.) Ministers had been expecting a drop in growth as a result of the international environment created by the prolonged financial crisis and the high prices of energy and raw agricultural materials which have been feeding inflation - but not such a massive drop. Juncker said that “shocks always have a general and symetrical effect on euro area economies” so that growth in the euro area “will remain low in the short term”. The Luxembourg Prime Minister, nonetheless, found some plus points: the euro has fallen against the dollar, although it was still “over-valued” - an issue that will be raised at forthcoming international meetings - and the prices of oil and agricultural goods were falling.
Response. Eurogroup ministers highlighted a number of principles to guide an appropriate response to the economic slow-down. “We dismissed all European recovery plans,” Juncker said, referring to the “nasty experiences” of some EU countries and casting doubt on the long-term effectiveness of the US recovery plan. “Europe reacts differently” from the US, “but it still reacts!” he said. Basing their action on the Revised Stability and Growth Pact, the euro area countries which have achieved their target of rebalancing public finances (Germany, Spain, Ireland, and others) will be able to let “automatic stabilisers” do their work, on condition that they stay below the acceptable public deficit limit. “This is not rigour,” it is about “letting the economy work,” said French Finance Minister Christine Lagarde. Euro area countries have also the option of taking specific measures to help the most deprived. These measures, however, have to be “temporary, targeted and inclusive,” Juncker stated. In France, the government is subsidising the cost of heating oil, Italy has put in place a windfall tax on oil company profits. Across the euro area, these exceptional measures will amount to 0.2% of GDP.
Structural reforms. The economic slow-down must not be allowed to be taken as a pretext for stopping structural reform. European Economic and Monetary Affairs Commissioner Joaquin Almunia stressed that the Lisbon Strategy had to be implemented. Reiterating the ECB's main priority of keeping inflation under control, the Bank's President Jean-Claude Trichet urged member states not to be deflected and warned against “second round effects” on wages and prices. Juncker said it was important to reform the labour and goods and services markets. “Competition has to make more room for itself,” he said; Wages could rise in line with improved productivity, but care must be taken that they do not rise too much. Against a background of tension on the financial markets, policies must not bear down too heavily on banks' ability to finance the economy. On the one hand, bank supervisors could be encouraged to not insist on excessive prudential requirements with regard to credit institutions. On the other, the EIB could provide reinforcement by both improving current lending mechanisms to banks and by accepting some of the risk borne by banks when they lend to companies and individuals.
Something which could see the EU by on the road to growth is the implementation of the European financial stability roadmap. The previous day, at the conference by French think tank EUROFI, Lagarde listed the areas where the French Presidency wanted to make significant progress. The review of the Basel II directive on the amount of capital banks are required to hold in reserve should mean that better account is taken of liquidity risks and risks related to securitisation. Credit rating agencies will, in future, have to be registered and to abide by the IOSCO international code of conduct if they wish to operate in the EU. Better integration of supervisory systems of cross-border financial institutions is also needed (see EUROPE 9738). “It will not be easy. Political courage will be needed,” since some decisions involve “a sharing of responsibility” among international authorities, acknowledged lLagarde, President in office of the Ecofin Council. However, she said she would not disrupt the institutional supervisory architecture by proposing the creation of the post of European Controller. She hoped that political agreement would be possible on the Solvency II draft regulation, recasting the rules governing the activities of insurance companies. She argued for a genuine internal market in asset management by the introduction of a European passport for fund management firms. (M.B./transl.rt)