EU finance ministers gave the European Central Bank a thumbs-up on Friday for its efforts to combat a global credit crunch and said they hoped the damage to economic growth from market turmoil would be limited.
As they met, Britain revealed its first big casualty of the crunch, mortgage lender Northern Rock, which was obliged to turn to the Bank of England for rescue loans.
"I don't think the worst is behind us," Jean-Claude Juncker, who chaired a meeting of European finance ministers and central bankers, told a news conference.
"We're all aware the risks of lower growth have increased," European Economic and Monetary Affairs Commissioner Joaquin Almunia added.
Almunia, Juncker and ECB President Jean-Claude Trichet all stuck to official forecasts of only marginally lower growth this year than the 2.7% rise in gross domestic product seen in 2006, while acknowledging the risk of a hit from market turmoil.
Juncker said euro zone governments were very happy with the "exemplary" response from the ECB, which has led attempts by many central banks in the world to counter the credit crunch by injected emergency loans into fear-riven money markets.
"The ECB has acted and reacted in the best possible way," said Juncker, who held a joint news conference with Trichet and Almunia.
Trichet said the euro zone's central bank, which has taken the lead in efforts to combat the credit crunch by providing money markets with tens of billions of euros in emergency loans since August 9, would continue to do what it could.
But it was too early to say now what precisely should be done to prevent repeat crises in the years ahead, he said.
"It's too early to draw definitive conclusions," he said at the news conference with Juncker and Almunia.
They spoke after the first few hours of a two-day meeting in Portugal, which began with a brain-storming session on a fog-bound river boat on the Douro river in Porto, a city in the north of the country famous for its fortified wines.
"We have to do what is appropriate to help our money markets function properly," said Trichet.
While some economists are starting to say the ECB will have to cut interest rates to shore up growth, there was no sign from Trichet that he had any intention of doing so.
Interest Rate Direction
"In our opinion inflation risks are on the upside, our monetary policy is still accommodative."
That is ECB-speak for saying that, if anything, rates will have to go up rather than down, even if the ECB has decided to leave rates where they stand in recent weeks while it deals with the more immediate problems of market turmoil.
Trichet refused to be drawn on differences with the Bank of England in response to the credit crunch.
The British central bank has remained noticeably more aloof while the ECB has been carrying out hefty loan injections on a regular basis to keep money markets, the basic source of short-term finance for the economy, operating smoothly.
Lack of access to such short-term credit was the main reason behind Northern Rock's troubles, which ultimately forced the hand of the Bank of England and the British government on Friday.
The global credit crunch germinated in the U.S. subprime mortgage sector, where home loans made to borrowers with poor credit records were repackaged and sold on as asset backed securities to institutional investors, including hedge funds, around the world.
The risk of mass defaults in the U.S. has prompted banks to curb lending to each other as they strive to calculate exposures to soured loans, forcing the world's major central banks to inject emergency funds into the global financial system to prevent it grinding to a halt.
Several other ministers in Portugal stressed that, short of any clear picture right now, the European economy had at least gone into the current turmoil in good shape.
"The European economy is robust, stable, no problem at all," said Austrian Finance Minister Wilhelm Molterer.
He, like French colleague Christine Lagarde and others, said it was now time, however, to assess what politicians and others could do to improve the transparency and accountability of what are increasingly complex financial markets.
The Porto talks, which run through Saturday, precede a visit by U.S. Treasury Secretary Henry Paulson to Europe next week, where he is due to meet the leaders of France and Britain as well as finance ministers and others worried by the market turmoil and potential damage it could cause to economic growth.
After their fog-bound river boat ride, ministers and central bankers form the 13 euro zone countries were due to broaden the discussions to a wider group including colleagues from the other 14 countries of the European Union.