EU finance ministers reject stimulus package to ward off recession
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European Union finance ministers meeting in the south of France for informal discussions over the weekend on a unified response to the darkening economic clouds agreed to boost loans to small and medium-sized businesses but ruled out any US or Japan-style major stimulus package to ward off recession.
EU finance ministers disagree over the correct response to the global financial turmoil (Photo: European Community)
Jean-Claude Juncker, Luxembourg's prime minister, finance minister and chair of the eurogroup - those member states that have adopted the euro as their currency - told reporters on Saturday (13 September) that such methods - increased spending, slashed interest rates and tax cuts - once tried by European countries in the 1970s only saddled economies with debt and otherwise had few positive effects.
"We had a small short-term impact and a bad long-term impact in terms of increased deficits and debts, which where then passed on to the next generations."
"I can only hope that [the US and Japan] will have more success in the medium term than when we tried it in the 1970s," said the eurogroup chair.
The assembled finance ministers did however, say that the European Investment Bank would now make €30 billion available as loans to small firms to make up for the shortfall in credit available from banks. The monies, roughly double the banks normal provision to such companies, will be spread over three years.
The German finance minister, Peer Steinbruck, called a larger stimulus package a "waste of money", reports Reuters.
Instead, inflation remained the priority concern, said the head of the European Central Bank, Jean-Claude Trichet, who also warned against workers demanding large pay increases to keep up with skyrocketing food and petrol prices.
Meanwhile, just a day ahead of the shock sale on Sunday of US securities giant Merrill Lynch to Bank of America for the knock-down price of $50 billion (€35 billion) and the decision by Lehman Brothers, another of America's pantheon of investment titans, to seek bankruptcy protection, Europe's finance ministers resolved to maintain the status quo, and let national banking regulators maintain responsibility for supervision of financial institutions.
The decision came days after EU internal market commissioner Charlie McCreevy warned that Europe's patchwork of national regulations meant the EU was not prepared to respond to a cross-border bank collapse on the scale of what has happened across the Atlantic, saying that co-operation arrangements between ministries of finance, central banks and supervisors were not "fit for purpose".
National finance ministers were opposed however to any shifting of responsibility to some more centralised authority at the EU level.
Ministers were also divided over whether to allow any cuts to value-added taxes to offer some relief to consumers.
While France, current chair of the EU's six-month rotating presidency, strongly supports such a move, initially proposed by EU taxation commissioner Laszlo Kovacs in July, almost half the 27 member states are opposed to the idea.
German finance minister Peer Steinbruck warned that cutting VAT would sharply cut government revenues.
Meanwhile, Mario Draghi, the governor of the Bank of Italy and chair of the Financial Stability Forum - the group of international financial authorities established in 1999 to ensure greater oversight of financial markers in the wake of the 1997 financial crises in Russian and Asia - told the ministers that worldwide, banks had lost some $500 billion in write-downs and losses so far as a result of the ongoing financial turmoil.
Mr Draghi said that that banks would need to raise another $350 billion in the coming period, and that the crisis would result in further bank collapses, leading to greater consolidation in the sector.
However, he did say that the eurozone was in better shape than other regions.
"Within the euro area the situation in the banking system is different. It is not as stressed," Mr Draghi told reporters, according to the Financial Times.