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Europe acknowledges sharp economic downturn

The European Commission slashed its economic growth forecasts for Europe on Wednesday in an admission that a downturn which began in the United States is hitting far harder than many imagined six months ago.

France, which holds the rotating presidency of the European Union, meanwhile rejigged the agenda for a Friday meeting of EU finance ministers to focus on the downturn, also admitting that things were looking much worse than initially expected.

The Commission, predicting what amounts technically to brief recessions in Germany, Spain and Britain, and not much better in other big economies, raised its forecasts for inflation at the same time as it lowered them for growth in the 15-country euro zone and 27-strong EU of which the euro zone is part.

It forecast gross domestic product growth of 1.3% for this year in the euro zone, and no longer the 1.7% it was reckoning on in April, when the Commission and many policymakers saw no risk of recession in Europe. It forecast growth of 1.4% for the broader EU, which includes Britain, Sweden, Denmark and several countries in the formerly communist eastern Europe, and no longer the 2.0% it had been counting on in April. Between April and now, policymakers have had to digest news that GDP shrank in the euro zone in the April-June period, the Q1 of GDP contraction recorded since the currency bloc was created in 1999.


BITING THE BULLET

Policymakers remained reluctant to use the word “recession” nonetheless on Wednesday, when European Central Bank President Jean-Claude Trichet stuck to describing the current downturn as a trough and European Commissioner Joaquin Almunia declined to endorse the R-word at a news conference on the new forecasts. “We will have a gradual recovery over the next years after the present depressed episode,” Trichet told the parliament.

Jean-Claude Juncker, Luxembourg prime minister and chief spokesman for euro zone finance ministers, inched a little closer though, saying when in the European Parliament: “When it comes to the euro area, I don’t see risks of a recession, although I can see risks of a technical recession.” Juncker, like Almunia, said inflation, which struck a record annual rate of 4.0% in July in the euro zone but dropped marginally to 3.8% in August after a dip in oil prices, was the key problem right now. Even if there was now hope of a decline in inflation, it was still way too high and fighting it was an “absolute obligation”.

The Commission raised its euro zone inflation estimate for this year to 3.6% from 3.1% previously, way above the ECB’s goal of keeping inflation in the medium-term near to but below 2%. The ECB raised interest rates in July in a move to counter inflation but higher borrowing costs also tend to dampen growth.


NICE TO ADDRESS IT

What Europe can do about the problem will be discussed when euro zone and then EU finance ministers and central bankers meet in France’s southern riviera coast city of Nice on Friday and Saturday, French officials said. Much discussion would focus on that balance between slowing growth and inflation risks but officials said governments would not seek confrontation with the ECB, whose chief Trichet will be at the meeting. However, the French officials said Paris “There should be a significant slowdown in inflation in the H2 of 2008,” the official said. believed the threat of inflation was receding due to a recent decline in oil prices and signs of similar movements in other commodity prices.

France saw no prospect of Europe adopting any big public spending plan to stimulate the economy in the way that the US administration has done with tax rebates of $100 billion or so this year. “We do not want a stimulus plan because it serves no purpose and it’s money spent in vain,” one French official, speaking to reporters on condition of anonymity, said. The meeting will try to persuade banks not to cut off credit to small and medium-sized firms and will look for extra help from the European Investment Bank (EIB).

Few details have been issued about the scale of assistance that might be provided by the Luxembourg-based EIB, which specializes in venture capital and guarantees for small and mid-sized firms through its European Investment Fund arm. But it is likely to play a central role in moves to ensure smaller firms are not starved of funds as conditions worsen.

Representatives from big financial institutions including Deutsche Bank, BNP and Nordea will be present for some meetings where they will hear the call not to turn off lending. They will also be concerned by discussions about improving coordination among Europe’s army of financial market regulators, aimed at harmonizing standards to improve transparency for banks across the region.

Lehman Brothers, the latest casualty of a credit crunch that spilled out of the United States a year ago, announced a record quarterly loss on Wednesday of about $4 billion, unveiling plans to sell a majority stake in its asset management unit and spin off commercial real estate holdings in an attempt to restore investor confidence and ensure survival. That came days after the US Treasury was forced to step in and take over mortgage giants Fanni Mae and Freddie Mac.

The European Commission said the market turmoil on top of the surges in food and fuel prices had finally taken their told on confidence in Europe and growth as a result. The end of a decade-long international housing boom, which came first in the United States but has since hit in Europe, “may increasingly take a toll”, the Commission said. (Reuters)