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EU's Bajuk: Europe Economic Fundamentals

Tuesday, January 22, 2008

EU's Bajuk: Europe Economic Fundamentals Sound

(Adds Almunia comments)

BRUSSELS (Dow Jones)--European Union finance ministers Tuesday insisted that their economies are in good shape to withstand the impact of a recession in the U.S. economy or turmoil in global financial markets.

The finance ministers held their regular monthly gathering here as stock markets fell again, having plummeted Monday. Investors are worried about the effect of a U.S. recession on company profits.

"We are facing a difficult situation in the stock market," said Slovenian Finance Minister Andrej Bajuk. "We believe the foundations of the European economy are sound and that they are better than those in the United States."

Slovenia holds the E.U.'s rotating presidency for the first six months of this year. Bajuk chaired the meeting of finance ministers - known as Ecofin - and was speaking at its closing press conference.

"We have to retain confidence in our financial markets," Bajuk said.

The finance ministers said further economic reforms were the best way of responding to the challenges posed by the prospect of a U.S. recession and financial market turbulence.

"We need to be determined in the future and implement further reforms," Bajuk said.

The U.S. administration last week announced plans for a $150 billion stimulus package to help the economy stave off recession.

But with its strict budget rules - embodied in the Growth and Stability Pact - the E.U. would find it hard to match that response, should the need arise.

However, Bajuk said those rules would not hamper the E.U..

"The ... pact remains ... a good foundation for facing the situation we are facing today," he said.

Speaking alongside the Slovenian finance minister, European Commissioner for Economic and Monetary Affairs Joaquin Almunia said the slump in stock markets was a delayed response to tensions in the global economy that emerged in August.

While credit markets seized up, and many interest bearing assets fell in value, equity markets held up through the end of last year.

"It's obvious that we are living in an uncertain period after the start of the turmoil last August," Almunia said. "The equity markets are reflecting these tensions. In 2007, equity markets did not reflect these tensions and now they are reflecting them."

Almunia added that stock markets were reacting to the specific threat of a recession in the U.S., and not a global recession that would involve the European economy.

"It's not about a global recession, its about recession in the U.S.," he said.

In common with finance ministers who have repeatedly stressed that the E.U. is in better shape than the U.S., Almunia again said the bloc doesn't share the U.S. economy's main problems.

"In the U.S. economy there is a big current account deficit," he said. "This is not the case in the European economy. We have a positive current account ... (and) sound fiscal positions. Indeed we do not have subprime conditions so we are well prepared to weather the risks."

Almunia said that the U.S. must cut both its current account deficit and its budget deficit if it is to return to sustainable growth.

The sharp falls in stock markets Monday and Tuesday led to speculation among some traders that major central banks - including the U.S. Federal Reserve, the European Central Bank and the Bank of England - would announce a coordinated reduction in their key interest rates Tuesday.

Almunia said there was no foundation to those rumors.

"I don't believe this rumor is based on ... reality," he said. "It's obvious that the central banks ... have coordinated intervention to provide liquidity but I am sure they will preserve their independence (when making interest rate decisions)."

Almunia also said the Growth and Stability Pact would help the E.U. weather the current financial and economic storm, and he added that the existence of a single currency also helped provide stability.

He acknowledged economic growth in the E.U. would be slower this year than finance ministers had previously expected, but said it would still be close to potential.

But while closely monitoring financial markets, Almunia said finance officials shouldn't panic.

"Our reaction needs to be orientated by serenity and calm," he said. -By Emma Charlton and Geraldine Amiel,

Posted by MOHAMED SAID at 5:53 AM  

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