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Eurogroup Chief Predicts 2008 Growth to be Hit by Subprime

Reuters
Wednesday, 5 Sep 2007 | 10:31 AM ET

Euro zone growth next year could be weakened by the credit crisis triggered by high-risk U.S. mortgage debt, the chairman of euro zone finance ministers, Jean-Claude Juncker, said on Wednesday.

"After talks with (EU Monetary Affairs) Commissioner (Joaquin) Almunia in Brussels last week and observations by the relevant economic institutes, it looks like in the year 2007 for the whole of the euro zone there will be no dampening of economic growth worth speaking of," Juncker told reporters.

But he added: "We now think -- although it is premature to make a final diagnosis -- that there could be a somewhat stronger dampening of growth in 2008."

The European Commission forecast in May that economic growth in the euro zone would slow to 2.6% this year from 2.7% last year and then further to 2.5% in 2008.

Almunia told the European Parliament an expected slowdown of U.S. growth due to the subprime mortgage crisis was bound to have some impact but the European economy was well placed to overcome the uncertainty.

Growth in the 27-nation EU and the 13-country euro zone this year and next would not outstrip the rates forecast in May, he said, but he offered no new figures ahead of the Commission's revised interim economic forecasts due next Tuesday.

"The impact of this turbulence could go beyond what we have seen so far, therefore we have to be very vigilant," he said.

Regional Differences

Juncker, who chairs monthly meetings of euro zone finance ministers with the European Central Bank, said the impact of the credit crisis and the turmoil it stirred up last month in financial markets could vary across the bloc.

"Ireland, Spain and Luxembourg, because of the dominant position of financial services, could suffer a stronger impact, also on tax revenue, than is likely to be observed in other regions of the euro zone," he said.

Markets expect the ECB to keep interest rates on hold on Thursday to help calm financial markets, even though the bank had signalled at the start of August it was ready to raise borrowing costs in September.

Keeping rates unchanged would be welcomed by many euro zone politicians, notably in France, which has often complained that ECB policy hampers growth by boosting the euro.

In an indirect rebuke to Paris, Juncker said the independent ECB should be left alone in its policy decisions.

"It would be good for the whole of the debate if governments would not comment on the rate policy of the bank ahead of this central bank meeting -- which is unfortunately not the case because common sense is not evenly distributed in Europe," he said. "The effect of this is only disruption."

European Internal Market Commissioner Charlie McCreevy told parliament the EU would look closely at the role of credit rating agencies, which needed to be clearer, but he warned against a rush to new regulation.

"We believe that "light touch," principle-based regulation is the best approach for the financial sector. It has proven its value. But we need to remain vigilant and draw lessons. All parties need to take their responsibility and take it seriously," McCreevy said.

Contact Europe: Economy

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