The European Union economy is at its low point and likely to start recovering next year, EU finance ministers said on Tuesday, calling for a return to fiscal discipline once growth returns. Euro zone finance ministers on Monday agreed with new forecasts by the executive European Commission that the EU would return to economic growth in year-on-year terms only in the third quarter of 2010 after a 4 percent contraction this year.
Finance ministers from the 27-country EU were to discuss the forecasts further on Tuesday. "It seems ... the recession is at its worst, but hopefully next year we'll start coming out of it," Czech Finance Minister Miroslav Kalousek, whose country holds the rotating presidency of the EU, told reporters before the meeting.
Recession this year will be cushioned by government spending equal to some 5 percent of EU gross domestic product, aimed at filling the void after private investment and exports collapsed amid the global economic downturn. But finance ministers said such spending could not continue forever. "After the crisis is over, we have to return to the limits of the Stability and Growth Pact," Greek Finance Minister Yannis Papathanassiou said before the monthly ministers' meeting.
The pact, which underpins the euro currency, spells out the EU's budget rules. It says budget deficits should not be higher than 3 percent of gross domestic product and that governments should aim to have budgets in balance or in surplus. The Commission forecast that the aggregate budget deficit in the EU would reach 6 percent this year and rise further to 7.3 percent in 2010 amid the worst economic downturn in Europe since World War Two.
Only six EU countries will stay below the deficit threshold this year and four in 2010, the Commission forecast, as a result of higher welfare spending, lower tax revenues and discretionary stimulus packages to boost growth. "All stimulus packages need to be temporary. We cannot go on like this after the crisis," Finnish Finance Minister Jyrki Katainen said.
EU leaders will discuss in June whether more spending is necessary to boost the economy, but Katainen said all such extra efforts would be futile unless the cause of the crisis - the banking system - was fixed first. "We have to solve the banking crisis first," Katainen told Reuters Financial Television in an interview.
"Stimulus packages are a kind of treatment of the symptom of the disease. Without pushing more money to markets, taxpayer money to markets, without treating the disease itself, it would not have helped us and the economic growth would not be on a sustained basis," he said.
Katainen also called for stress tests of European banks similar to those in the United States. "We need a European-wide method to stress test banks first of all because the name of the economic disease is the banking crisis and we cannot expect any recovery in the real economy before trust has returned to the banking sector," he said. He said that to return budgets to balance, governments must be ready to take "drastic" steps. He pointed to a need for pension reforms, possible tax hikes and spending cuts.
"Of course it causes worries when there are such huge deficits in different countries, especially in the euro area, because we have our common currency and we have to take care of the credibility of the currency in the future," he said. "We have to stick to common rules and we have to be ready to make even drastic changes after this crisis to our budgets and to our taxation," Katainen said.