Tags: EU | Europe | Financial | Crisis

EU Demands Cost Cuts to Calm Fears, Keep Euro Credible

Tuesday, 18 May 2010 07:04 AM

EU nations are pushing for deep deficit cuts Tuesday to restore confidence in European governments' ability to tame the debt crisis and keep it from derailing the economic recovery.

Investors fear that European countries will not be able to reduce mounting debt and avoid years of slow economic growth despite a 750 billion euro ($1 trillion) rescue package agreed last week to help euro zone nations avoid default.

EU Economy Commissioner Olli Rehn told reporters Tuesday that finance ministers would negotiate tougher budget rules because "it is now very important to reinforce confidence in the euro economy."

Market worries about Europe's economy have helped fuel the euro's fall to its lowest level against the dollar since April 2006 and lifted the price of gold, traditionally a safe haven when markets lose faith in other assets.

German Finance Minister Wolfgang Schaeuble — whose country is paying the largest chunk of both the rescue package and a 110 billion euro bailout for Greece — said deficit reductions have to be a priority for the EU's 27 governments.

Closing the budget gap between what governments spend and earn each year would also reduce the risk of other countries requiring a bailout.

"We must now show that we are dealing with the crisis, defending the euro, but without letting matters rest — that we erase the causes of the crisis permanently," he said. "That means reducing deficits, the real cause."

Anders Borg, Sweden's finance minister, called for new debt and deficit limits, saying a 2013 deadline for most countries to bring deficits to 3 percent of gross domestic product was "not very ambitious."

However, the 16 countries that use the euro are concerned that sharp spending cutbacks could damage economic growth — and are asking the EU's executive commission to assess this summer which of them can afford to reduce debt quickly without their economies grinding to a halt.

Euro zone finance ministers defended the euro as a "credible" currency on Monday, saying price stability in the region will remain for years to come and "is a major feature of the euro and a major asset for investors."

Jean-Claude Juncker, who leads regular talks between the ministers, tried to reassure investors.
"We trust that the euro is a credible currency," he said, reading out a statement released early Tuesday after a meeting of finance ministers of the 16 countries that use the euro.

"Price stability has been fully maintained in the euro area for 11 years and will be maintained in the years to come. This is a major feature of the euro and a major asset for investors," he said.

Inflation — or a rise in real prices that reduces the burden of existing debt — may be stoked by government bond purchases that the European Central Bank is making as part of the EU rescue package.

Until that plan was announced, the ECB had vowed it would not buy bonds out of a concern that it might cause inflation expectations to rise.

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