EU Ministers Say Premature to Enact Exit Strategies
European Union finance ministers said it’s too soon for governments to reverse stimulus measures as the region’s economy struggles to pull out of the worst recession since World War II.
“We haven’t reached the time yet at which the exit strategy could be applied. We’re still in the middle of the crisis,” Luxembourg Finance Minister Jean-Claude Juncker said after leading a meeting of euro-area counterparts in Brussels late yesterday. EU Monetary Affairs Commissioner Joaquin Almunia said “this is not the moment” to remove the stimulus.
The remarks reinforce the view of the Organization for Economic Cooperation and Development that the euro area will be mired in a recession for the rest of the year. The Paris-based group cut its 2009 forecast for the region last month, even as it raised its outlook for the global economy for the first time in two years.
Juncker said the global financial turmoil may cut potential output in the euro area from 2.2 percent to less than 1 percent from 2009 to 2010. The decline “will be all the greater if the determined collective measures of governments are not strong enough,” he said.
While it may not be time to withdraw stimulus, officials still need to start discussing plans as a “clear exit strategy” will help confidence, said Almunia, who attended the meeting of finance ministers.
‘Not So Easy’
Other finance ministers also said that risks to growth remain. Spain’s Elena Salgado said that a return to growth this year “is not so easy to achieve,” though some signs of recovery will emerge and expansion will resume in 2010.
Earlier this month, European Central Bank President Jean- Claude Trichet said that economic activity this year “is likely to remain weak, but should decline less strongly than was the case in the first quarter.”
Both Juncker and Almunia downplayed the threat of deflation in the euro area, where consumer prices fell 0 cash advances.1 percent in June, recording their first annual decline. The ECB aims to keep inflation just below 2 percent.
“Over the medium term, we’ve got inflation solidly anchored around the ECB’s forecast,” Almunia said. “The majority of the prices within the price basket will continue to grow. We believe also that wage trends do not suggest that deflation is just around the corner.”
OECD Outlook
The ECB started buying 60 billion euros ($84 billion) of covered bonds yesterday, its latest effort to ease credit tensions and encourage lending, after leaving its benchmark interest rate at a record low of 1 percent earlier this month.
While European economic confidence rose to the highest in seven months in June, and a measure of manufacturing is also improving, unemployment is continuing to rise, which will weigh on consumer spending.
The OECD sees the euro-region economy shrinking 4.8 percent this year, it said on June 24, cutting a March forecast for a 4.1 percent contraction. At the same time, it said the combined economy of its 30 member nations will shrink 4.1 percent this year and grow 0.7 percent in 2010, compared with a previous projection for contractions of 4.3 percent and 0.1 percent.
Officials’ efforts to staunch the slump are weighing on public finances and have pushed some countries over the EU’s deficit limit of 3 percent of gross domestic product. Ministers will set a timeframe today for Hungary, Lithuania and Poland to bring their budget gaps to within the limit, having already set deadlines for Ireland, France, Spain and Greece.
“Lower potential growth and a lower output gap will constrain the room for maneuver for our fiscal policies in the near future,” Almunia said. Officials should aim “not to create further imbalances when designing how to get out of this crisis.”