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UPDATE: Euro Group Downplays Risk Of Contagion From U.S.

(Adds quotes from final press conference, French minister)

By Paul Hannon

Of DOW JONES NEWSWIRES

BRUSSELS -(Dow Jones)- The U.S. may be the world's largest economy, but in a world where China and India are growing rapidly, it no longer determines Europe's fate.

That's the message broadcast by some finance ministers from the 15 countries that use the euro at their monthly meeting here Monday. And on a day when Europe's stock markets plummeted, it was a message that was intended to reassure.

The U.K.'s FTSE 100 slumped 5.5% to 5578.20, while Germany's DAX Index plunged 7.2% to 6790.19. France's CAC-40 Index fell 6.8% to 4744.15.

Euro-zone finance ministers said the big declines in share prices likely reflected investor efforts to gauge exactly how large an impact a U.S. recession would have on company profits.

But they also stressed that with U.S. markets closed, Monday's moves may well have been exaggerated by a lack of liquidity.

"Probably the markets have assessed the situation in the U.S." said Spanish Finance Minister Pedro Solbes. "Today we have a very special day and we should not take excessive, permanent conclusions. We are worried in the sense that we have to follow what's happening every hour and to try to understand what is happening."

The U.S. remains a significant trading partner for the euro zone, second only to the U.K. in terms of the value of exports and imports.

Over the 10 months to October 2007, the euro zone had a trade surplus of EUR54.7 billion with the U.S., down only slightly from EUR57.6 billion during the same period in 2006, despite the euro's appreciation against the U.S. dollar.

But with a growing number of economists now predicting that the U.S. economy will experience a recession this year as the housing market undergoes its worst downturn since the 1970s, the euro zone is unlikely to be able to count on a similarly large surplus this year.

However, euro-zone finance ministers insisted that their economies are less dependent on the U.S. than previously, and stressed the role China, India and other large developing economies will have in driving world economic growth this year.

"Developments in the U.S. will still have an impact on the European economy, but much, much less than in the past," said Dutch Finance Minister Wouter Bos. "We see that the euro zone makes trade and business with many other parts of the world, not just the U.S.. China and India have increasing influence in world markets and they keep growing at an incredible pace."

European Commissioner for Economic and Monetary Affairs Joaquin Almunia said the euro-zone economy would not be "directly" affected by a the U.S. slowdown.

"Our economies in the past were more dependent on the U.S.," he said.

But in addition to the direct impact of the slowdown on the U.S.' demand for goods and services from the euro zone, there are also indirect effects to consider. Chief among those is the negative impact a recession in the U.S. would likely have on business and investor sentiment, evidence of which was clear in the stock market falls.

So despite their assurances that the euro-zone economy is better insulated from events in the U.S. than previously, euro-zone finance officials are still hoping that their U.S. counterparts can avert a recession, or at the very least ensure it is shallow and brief.

U.S. President George Bush has laid out plans for a $150 billion package of measures designed to stimulate the economy, while the U.S. Federal Reserve is expected to continue to cut its key interest rate in the months head.

"I hope that the measures that the U.S. administration and the Federal Reserve can adopt in the coming days can counter this risk of recession," Almunia said.

And should they fail, some finance ministers looked to the European Central Bank to help out by cutting its key interest rate. Speaking at a press conference following the meeting, French Finance Minister Christine Lagarde said she was confident that were euro-zone growth to be "substantially lower" than expected, the ECB would take that into account.

Euro-zone finance ministers also stressed that following many years of reform, the currency area's economy is in fundamentally better shape than its U.S. counterpart.

"I would like to draw your attention to the fact that the economic situation in the U.S. is in no way comparable to that in Europe," said Jean-Claude Juncker, Prime Minister and Finance Minister of Luxembourg.

Juncker heads the Euro Group, which comprises finance ministers from the euro zone.

"Our fundamentals are sound, restructuring is advancing well ... so the situation to which the Americans must react is very different from the one by which Europe is confronted," Juncker said, summarizing discussions at a press conference after the Euro Group had finished its meeting.

The 15 ministers from the euro zone - known collectively as the Euro Group - had always intended to discuss growing signs that a significant economic slowdown is underway.

The stock market slump was a late addition to their agenda, which also includes crafting a common message on foreign exchange rates to take to a meeting of finance officials from the Group of Seven leading developed economies in Tokyo on February 9.

Bos said finance officials from the euro zone should stick to the view that foreign exchange rates should reflect economic fundamentals, an implicit criticism of countries like China that manipulate their exchange rates by intervening in the markets.

"Currency rates should reflect the fundamentals of the economy," Bos said. "And the strong euro represents the strength of the European economy, the fundamentals are good."

The Euro Group will be joined by finance ministers from the rest of the 27-member European Union Tuesday.