Europe sets deadline for exit strategy

October 02, 2009 03:51:23 PM

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Europe scheduled an end to economic pump-priming Thursday with a pledge to tackle bloated national deficits, as bank 'stress-tests' showed hundreds of billions of euros vanishing into the ether.

France, Germany and the other 14 countries that use the euro single currency agreed to set a 2011 deadline to implement an exit strategy aimed at normalising conditions after trillions of government money poured into their battered economies.

While the full 27-member European Union, which in Britain houses the continent's financial powerhouse, fell just short of committing to that date, it also signed up to principles which identified curbing the pile-up of national debt as the keystone for sustainable recovery.

Financial ministers and central bankers meeting in Gothenburg to map out the way ahead for Europe following G20 moves to shape global economic policy-making said the results of a probe into the health of European banks would see its big finance houses survive even their worst-case scenarios.

Saying its lenders are "sufficiently capitalised", Swedish Finance Minister Anders Borg said "reassuring" credit losses of 400 billion euros for 2009 and 2010 were calculated using an "adverse scenario".

Even then, he said, "none of the banks would fall down on their tier one capital requirements".

The dollar loss projections for the 22 European banks -- representing over 60 percent of all banking assets held within the EU -- amount to 580 billion and have been the subject of transatlantic debate over accounting methods.

"It was very harsh as regards the assumptions we used," insisted European Central Bank governor Jean-Claude Trichet of scenarios forecasting a decrease in European Union Gross Domestic Product of 5.2 percent for 2009 and a 2.7 percent drop in 2010.

The Organisation for Economic Co-operation and Development said last month that International Monetary Fund figures put potential write-downs for continental European banks at up to 1.1 trillion dollars.

The governor of the German central bank, Axel Weber, said the 400-billion figure, which represents a "tiny part" of the sums involved in government bailouts, was bearable "compared to the total capital of the different banks".

Luxembourg's Prime Minister Jean-Claude Juncker said exit strategies, "can be applied during 2011".

His loose timetable was conditional on further improvement in fragile economic data and would be firmed up after the European Commission presents its 2011 economic forecast on November 3.

"The time has not yet come... to withdraw fiscal stimulus," he insisted. But he underlined that once growth returns, "budgetary adjustment will have to go beyond the 0.5 percent of Gross Domestic Product agreed earlier".

A spiralling drain on public finances combined with diminished growth potential, which Juncker said was down from 2-2.5 percent before the crisis to around 1.5 percent for the euro countries over the next decade, has concentrated minds.

Not least with unemployment surging to 15.165 million across the EU in new data also released Thursday.

The International Monetary Fund meanwhile anticipated Thursday that the eurozone economy would suffer a 4.2 percent contraction this year before returning to growth of 0.3 percent in 2010.

And 20 of the 27 EU countries -- including 13 in the eurozone -- are now or about to be operating above internal three percent eurozone deficit threshold rules.

The EU commission also fears debt levels across the eurozone will reach 100 percent of GDP by 2016 -- up from 69.3 percent in 2008.

Swedish host Borg said there was "no disagreement" on the 2011 date, saying the EU's common position was "obviously in line also with views from the UK".