Euro zone ministers to raise fears of slow recovery

Euro zone finance ministers are expected to voice fears on Monday that a recovery from the economic crisis could be slow as the region's ability to generate new wealth will shrink, diplomats said.

• At a monthly meeting, the ministers are also likely to conclude that the current fall in consumer prices should not cause too much concern, and they will debate further when they should start cutting their budget deficits swollen by fiscal stimulus programmes.
• “When discussing the economic situation, the ministers will focus on the impact of the crisis on potential growth,” one diplomat said, referring to a term describing the highest economic expansion sustainable over the long term.
• European Union and euro zone officials believe that potential growth in the 16-nation region, which was already low before the crisis at 2 percent, will shrink while high unemployment would persist for long.
• “You can see that Europe will not have the growth potential it had before the crisis,” EU Monetary Affairs Commissioner Joquin Almunia said this week.
• But the ministers are likely to state that the worst is over for the euro zone, although a modest recovery would start only in 2010, with its scale also depending on whether the financial system could be healed.
• “The fact that we are moving away from the bottom now can mean either that the economy is going upwards, or that maybe it is a bounce and after that we could go down again and stay down for a while,” said a source involved in preparation of the Eurogroup meeting.
• “What happens in the banking system will be crucial — if credit channels are unblocked …, then there could be gradual improvement. There, general mood is cautiously positive,” the source added.
• The source said that more and more euro zone and EU governments, with the notable exception of Britain and France, believed they should start to withdraw from their fiscal stimulus programmes sooner rather later.
• French plans to ignore the 2012 deadline of bringing its deficit below the EU’s cap of 3 percent of economic output, imposed by EU finance ministers, are not at this stage expected to be discussed.
• The ministers are likely to side with the view of the European Central Bank that the current period of negative inflation would be brief and would not lead to harmful deflation, or prolonged falls in consumer prices.
• RELAX CAPITAL RULES?
• They will also debate an overhaul of decision-making at the International Monetary Fund, facing pressure from EU institutions to create a single seat at the Fund for the bloc and from emerging economies which want greater clout.
• On Tuesday, when euro zone ministers are joined by their counterparts from the whole 27-nation EU, Germany may propose relaxing global rules on capital charges to ease writedown pressures on banks holding toxic assets.
• “Germany would have to make the case and we will see how the discussion goes,” said a senior diplomat from Sweden, whose country holds the rotating presidency over the EU.
• The German proposal would be made during a debate on new regulations to discourage banks from pro-cyclical behaviour, or minimise financial fluctuation throughout the economic cycle.
• The ministers are also expected to give Poland and Latvia until 2012 to cut their budget deficits below 3 percent of GDP. Hungary, Lithuania and Romania will be told to go below the ceiling in 2011.