Eurozone ministers meet amid gloomy economic forecasts

Jan 19, 2009, 16:25 GMT

Brussels - The eurozone's finance ministers were meeting in Brussels on Monday amid dreadful new economic forecasts predicting a deep and prolonged recession for their 16-member club.

According to the European Commission's latest estimates, gross domestic product in the euro area is set to shrink by 1.9 per cent this year, after growing by 1.2 per cent in 2008.

A modest economic recovery is not expected until 2010, when GDP is forecast to grow by 0.4 per cent, but only if rattled financial markets start working again and if EU governments stick to a 'rapid and effective' implementation of their national stimulus packages, EU Monetary and Economic Affairs Commissioner Joaquin Almunia said.

One of the ministers' greatest concerns as they met in Brussels involved Europe's economic locomotive shifting into reverse: German GDP is forecast to fall by 2.3 per cent in 2009.

As Dutch Finance Minister Wouter Bos noted upon his arrival in Brussels: 'When Germany coughs, we all catch a cold.'

German Finance Minister Peer Steinbrueck said the forecasts published by the commission on Monday were in line with the German government's own forecasts, which are due to be released on Wednesday.

'This is not a surprise,' Steinbrueck said of Monday's figures.

The European economy is reeling from an unprecedented global credit crunch and one of the worst economic downturns since World War II.

So far, EU governments have vowed to inject some 130 billion euros (171 billion dollars) in extra spending and have set aside billions more to guarantee that banks survive and start lending again.

However, 'the great unknown is whether any of the intervention packages, both those aimed at the financial sector and those aimed at the EU economy, will prove to be effective or not,' Bos said.

The combination of emergency extra public spending and falling tax revenues is expected to push many eurozone members to breach the bloc's strict rules limiting budget deficits to 3 per cent of GDP.

But Steinbrueck, who will oversee a deficit of 2.9 per cent of GDP after years of budgetary virtue, said the bloc's so-called Stability and Growth Pact was in no danger of falling apart.

'The pact is not in danger,' the minister said, noting however that its credibility needed to be defended.

Spain and Greece have already had their credit ratings cut because of concerns about the state of their public finances, with experts predicting Portugal and Ireland could soon follow suit.

Monday's meeting was also being attended by Almunia and European Central Bank governor Jean-Claude Trichet, who last week cut interest rates to an all-time low of 2 per cent in a desperate bid to kickstart the European economy.