No New Stimulus In Europe

Bloomberg yesterday:

EU Finance Chiefs Plan No New Stimulus Even in ‘Social Crisis’


By Simon Kennedy and Meera Louis

May 5 (Bloomberg) -- European finance ministers said they have no plans to bolster their fiscal stimulus packages even as they warned that rising unemployment risked triggering a “social crisis.”

“We’re heading toward a social crisis; there will be an unemployment crisis,” Luxembourg Finance Minister Jean-Claude Juncker told reporters in Brussels late yesterday after leading talks of counterparts from the 16-nation euro region. “Even so, we do not believe euro-zone states should be adding to the economic programs they have decided upon.”

The ministers gathered hours after the European Commission, the European Union’s executive body, warned that the euro area will suffer its deepest recession since World War II this year and predicted the unemployment rate will reach the highest on record in 2010.

Companies across the continent including Germany’s BASF SE are cutting production and firing workers to survive the slump. Limiting the scope for governments to help are rising budget deficits following previous tax cuts and spending increases and the suspicion that more aid would fail so long as banks are plagued by toxic assets.

“We need to make sure the planned stimulus packages will really take effect,” said Dutch Finance Minister Wouter Bos. “A second round of stimulus packages -- that will cost more tax money and with dubious effects.”

Budget Deficit

The commission projected the euro-area economy will shrink 4 percent in 2009 and 0.1 percent in 2010. The region’s average budget deficit will widen to 6.5 percent of output next year, when unemployment will rise to 11.5 percent from 8.9 percent in March, it said.

Juncker called on employers not to shed staff prematurely and said policy makers should focus on finding ways to help those out of work to secure new jobs through retraining.

Finnish Finance Minister Jyrki Katainen urged his counterparts to follow the U.S. by subjecting banks to stress tests in order to restore trust in the financial industry and growth to the economy. The International Monetary Fund, the Washington-based lender with 185 member nations, last month warned Europe that its banks will have to write down $750 billion through next year.

“The name of the economic disease is banking crisis,” Katainen told Bloomberg Television. “We need to recover the trust within the banking sector and I don’t see any other way.”

Speaking separately in Brussels, European Central Bank Executive Board member Lucas Papademos said “there will not be strong and sustained recovery before balance sheets are strengthened and repaired.”

Automatic Stabilizers

Around 5 percent of EU gross domestic product already has been committed to reversing the recession in the form of recovery plans and so-called automatic stabilizers such as jobless benefits, the commission said yesterday.

Signs are emerging that may be paying off. A gauge of manufacturing activity rose to a six-month high in April, according to a survey of purchasing managers by Markit Economics published yesterday.

“Everybody agrees we are now in the worst moments of recession,” EU Monetary Affairs Commissioner Joaquin Almunia said at the press conference. “At the same time we observe positive signals.”