Financial Crisis Poses `Serious' Tests, Almunia Says

By Matthew Newman

Oct. 16 (Bloomberg) -- European Union Monetary Affairs Commissioner Joaquin Almunia said the turmoil in the global financial system poses ``serious challenges'' for economic growth in Europe.

``There is no doubt that the financial crisis is impacting the non-financial sector, both households and businesses,'' Almunia said in a speech to a conference in Brussels today. ``There is a significant risk that potential output growth will be negatively affected in the time to come.''

Leaders from the 27 EU nations are pushing for an overhaul of the financial system to prevent a repeat of the credit crisis that sparked the biggest stock-market selloff since the Great Depression. They pledged today at a summit in Brussels to boost lending to industry, the first indication that an economic- stimulus plan may be needed as the banking turmoil threatens to tip Europe into a recession.

``Expectations regarding economic activity have rapidly deteriorated in the past two months,'' European Central Bank council member Guy Quaden told a separate Brussels conference today. He said the ECB will ``act firmly whenever necessary'' in response to the financial crisis.

The 15-nation euro region's economy will probably stagnate this quarter after shrinking in the previous three months, the European Commission forecast on Sept. 10. The commission also lowered its full-year growth forecast to 1.3 percent from 1.7 percent and signaled the 2009 outlook may also be cut. New growth forecasts are due on Nov. 3.

`Inadequate Supervision'

Almunia said the crisis is a consequence of ``inadequate supervision and regulation'' of the capital markets, adding that ``our financial systems have proved highly vulnerable to liquidity and confidence problems.''

Policy makers ``have to recognize the serious risks to economic stability and growth prospects of the current model'' of international financial-market structure, which has ``proved unsustainable,'' the commissioner said.

The financial crisis ``is compounding the effect of the oil and commodity price shocks that hit before the summer,'' Almunia said. ``Although these prices have eased since, volatility in energy and food markets are likely to characterize the global economy for some time.''

Oil prices have dropped almost 50 percent from their all- time high in the last three months, helping euro-area inflation slow for a second month in September after reaching a 16-year peak in the summer. Energy-price inflation eased to 13.5 percent last month from 14.6 percent in August, while food-price gains slowed to 5.7 percent from 6.2 percent, data yesterday showed.

`Durably Higher'

``We cannot rule out that we may be facing an environment with durably higher energy prices,'' Almunia said.

The commissioner also warned against governments erecting trade barriers to shield domestic companies from international competition. ``We also face the serious danger that the financial crisis and a cooling global economy give way to a surge in protectionism,'' Almunia said.

To contact the reporter on this story: Matthew Newman in Brussels at mnewman6@bloomberg.net.