EU Ministers Rule Out Joint Stimulus, Back `Coordinated' Action

By Fergal O'Brien

Nov. 4 (Bloomberg) -- European finance ministers ruled out a joint stimulus package to revive the region's economy and vowed instead to coordinate national policies as they try to limit the fallout from a recession on consumers and companies.

``We do not believe that in the euro area we need a general revival package, a sort of traditional program designed to stimulate the economy,'' Luxembourg Finance Minister Jean-Claude Juncker told a press conference after leading a meeting of euro- area counterparts in Brussels yesterday.

Euro-area finance chiefs met hours after the European Commission slashed its growth forecasts and predicted that the economy would stagnate next year. While French President Nicolas Sarkozy has called for a joint package to help the region combat the economic slump, the ministers indicated they favor a looser system of ``coordinated'' measures.

European Union countries have already begun planning measures to jumpstart their own economies, with Germany preparing a two-year program of investments and incentives to provide a 50 billion-euro ($64 billion) stimulus. EU Monetary Affairs Commissioner Joaquin Almunia said such plans weren't at odds with the EU approach.

``I don't think adopting measures at the national level is inconsistent with the need to coordinate actions, provided the national decisions are integrated in an adequate framework,'' he said at the press conference in Brussels late yesterday. ``What I want to avoid is the negative spillover of some decisions that can create problems for the good functioning of the internal market.''

Financial Rules

Both Sarkozy and U.K. Prime Minister Gordon Brown have called for a redrawing of global financial rules under a ``new Bretton Woods,'' referring to the 1944 conference that created the modern global economic system as well as institutions including the International Monetary Fund and World Bank.

French Finance Minister Christine Lagarde may continue to push for an EU-wide plan when ministers from all 27 EU nations meet today. European heads of state are set to meet later this week before a Nov. 15 summit of the so-called Group of 20 industrialized and developing nations in Washington.

``It's a goal the president never gave up on, so I'm not going to give up on it either,'' Lagarde said in an interview with Bloomberg News before yesterday's meeting, referring to Sarkozy. ``We must tackle it collectively.''

Juncker and Almunia both said any measures must not be introduced at the expense of the EU's Stability and Growth Pact, which sets a budget-deficit limit of 3 percent of gross domestic product.

`Exceptional Circumstances'

``We don't intend to change the rules of the Stability and Growth Pact,'' Juncker said. Almunia said countries could ``draw on the flexibility provided by the pact,'' which allows temporary breaches in ``exceptional circumstances.''

As well as cutting its economic-growth outlook, the Brussels-based commission yesterday forecast that the euro area's average budget deficit will widen to 1.8 percent in 2009, which would be the biggest since 2005, from 1.3 percent this year. The euro region's economy will grow just 0.1 percent next year, the worst performance since 1993, after shrinking for three consecutive quarters this year, it said in its autumn forecasts.

``Some of the countries are technically in recession,'' said Slovenian Finance Minister Andrej Bajuk. ``We are in a very strong slowdown.''

The European Central Bank, which has already offered unlimited dollars to unfreeze credit markets, cut interest rates last month for the first time since 2003 as part of a global coordinated move. The ECB and the Bank of England both will probably cut their key rates by another 50 basis points this week, surveys of economists show.

`Downside Risks'

The commission's forecast ``reflects the downside risks'' to the economy, said German Finance Minister Peer Steinbrueck. ``We are facing a very serious and problematic year.''

Europe's manufacturing industry is already shrinking at a record pace, according to data published yesterday, while executive and consumer confidence has plunged to the lowest in 15 years. Still, inflation is easing as oil prices drop, giving the ECB room to cut interest rates more.

While the EU's outlook includes a technical recession this year and little growth in 2009, it may still be too optimistic, said economists at Citigroup Inc. and BNP Paribas, both of which have forecast a contraction next year.

The forecasts ``are a dramatic shift for the commission,'' said Luigi Speranza, an economist at BNP in London. ``But there is more downside to come.''

To contact the reporter on this story: Fergal O'Brien in Brussels at fobrien@bloomberg.net.