German, Italian employers warn of credit crunch

There are worrying signs of a credit crunch developing in Germany and Italy and the European Union should take urgent action to loosen capital requirements for banks, German and Italian employer groups said on Thursday. In a joint letter to European Commission President Jose Manuel Barroso and Swedish Prime Minister Fredrik Reinfeldt, who holds the rotating presidency of the European Council, Italy's Confindustria and Germany's BDI warned the signs for the second half of 2009 "are not reassuring."
"In Germany and Italy there are worrying signs of a credit crunch underway ... This could have dramatic consequences for investments and employment in two of the European Union's largest economies," read the letter, translated from Italian. "The EU must urgently ease the capital requirements of banks and the methodology for calculating risk to facilitate companies access to credit and rapid economic recovery."
The industry groups said that Basel II rules on banks' capital structure had tended to exacerbate cyclical economic fluctuations, tightening the supply of credit just when it was most needed by businesses to fuel an economic recovery. Oliver Drewes, spokesman for the European Union's Internal Market and Services Commisioner Charlie McCreevy, said the Commission was already preparing steps to address the problem. "A decision could be reached in September. The fight against damaging procyclical effects are among the Commission's priorities and are being handled urgently," he said.
But the BDI and Confindustria warned that efforts to overhaul the system risked being too delayed to make any difference. "The expected reforms could come too late for many companies," the joint letter said. "Exceptional circumstances require exceptional responses."
BDI Managing Director Werner Schnappauf warned this week that a shortage of credit could hurt a nascent recovery in the euro zone's largest economy, which grew by 0.3 percent in the third quarter. Italy, the euro zone's third largest economy, reported a better-than-expected 0.5 percent contraction in the second quarter, but remains mired in its worst post-war recession.