Finland's Katainen Says Europe May Face Recession

By Kati Pohjanpalo and Paul George

Oct. 23 (Bloomberg) -- The European economy may be headed for a recession that could last two to three years, Finland's Finance Minister Jyrki Katainen said.

``Recession is very close in some particular countries, maybe in all the European countries,'' Katainen, 37, said in a Bloomberg Television interview in Helsinki yesterday. ``I don't know how long a recession or down-cycle we will face, but maybe it will take some two or three years. Even if we can calm the international turmoil, slower economic development will follow.''

Slower growth in Europe has been worsened by the U.S.-led credit crisis, which has caused $660 billion of writedowns and losses by banks worldwide and forced governments to rescue lenders. France, Germany, Spain, the Netherlands, Austria together with other European nations have set aside more than 1.3 trillion euros ($1.7 trillion) to protect financial institutions by guaranteeing bank loans and taking stakes in lenders.

While the euro-area economy has not suffered a recession since the single currency began in 1999, Credit Suisse Group calculates that its 15 economies combined have suffered three recessions since the 1960s. The European Central Bank, which cut its benchmark rate in coordinated action with other central banks to bolster the global economy this month, has only one mandate: to ensure price stability.

`Obvious'

``It's quite obvious that the inflation rate will come down because the economic situation is going down,'' Katainen said. ``That's very good because it enables the ECB to make rate cuts and that's a very good message for the European economy.''

The pace of consumer price growth has slowed in the euro area from a peak of 4 percent in June and July to 3.6 percent in September. The euro economy shrank 0.2 percent in the second quarter and the European Commission estimates growth stagnated in the third.

A recession is widely defined as a decline in a country's gross domestic product for at least two quarters. One of the European countries nearing a recession is Spain.

``We're very close to zero,'' growth, Spanish Finance Minister Pedro Solbes said in an interview in Madrid yesterday. Still, cheaper crude and the euro's decline may ``allow that if there is negative growth in the Spanish economy that it would be limited, if possible, to one quarter.''

Record Amounts

With the drop in oil prices making the ECB's 2 percent inflation ceiling ``more achievable,'' the bank would give ``more weight'' to the pace of growth when setting monetary policy, Solbes said.

Central banks are providing record amounts of liquidity to banks to ease the effects of the financial crisis on global economic growth. The ECB yesterday offered dollars into the euro- region banking system for the second time this week in order to boost lending among financial institutions.

The Federal Reserve, ECB and Bank of England also lowered their interest rates by half a percentage point on Oct. 8 leading an unprecedented coordinated effort with other central banks.

``The rate cut was a very good message for the current economic situation and if there is more to come, I mean rate cuts, it would fuel economic growth,'' Katainen said. ``The rate cut together with the package the Eurpean Union has decided now, they together can bring us forward,'' he added.

Growth Peak

Finland, one of the fastest expanding economies in the euro area in recent years, is also headed for a period of cooling after growth so far this decade peaked at an annual rate of 5.9 percent in the second quarter of 2006. Last year, the rate of expansion exceeded 4 percent.

``I could imagine that next year's growth will be between 1 percent and 1.5 percent,'' Katainen said. That's less than the Finance Ministry's latest estimate, given Aug. 27, for growth of 1.8 percent next year.

Past economic slumps in the member states of the euro area, in 1974-75, 1980-82 and 1992-93 lasted six quarters and involved a decline in gross domestic product of more than 1 percent, according to Credit Suisse. History also suggests unemployment will rise by at least two percentage points to 9 percent in 2010.

To contact the reporters on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net; Paul George in London at paulgeorge@bloomberg.net.