Withdrawal of stimulus unlikely before 2011, say EU finance ministers

EU FINANCE ministers said last night they are unlikely to withdraw exceptional stimulus measures before 2011 due to the impact of rising unemployment and the strengthening euro on the tentative economic recovery.

The ministers also committed at an informal meetings of the 27-member Ecofin group to strike a political deal on an overhaul of Europe’s system of financial regulation by the end of the year.

Their aim is to have the new system, based on proposals published last week by the European Commission, implemented next year. The plan includes a new European Systemic Risk Board, bringing together 27 EU central bank governors and the European Central Bank (ECB), which will be incorporated into proposals by the Government to reform the Irish regulatory system.

Having spent billions of euro in emergency measures to prop up the European economy and offset the impact of the worst recession in 60 years, finance ministers are discussing the form and timing of exit strategies. EU monetary affairs commissioner Joaquin Almunia told a press conference that governments will start to pull back their stimulus measures once economic growth takes hold.

But Eurogroup chairman Jean-Claude Juncker, head of the countries in the single currency zone, said the time had not yet come to withdraw stimulus measures as recovery was still very fragile.

The group will look to the commission’s first forecast for 2011 next month to see if the economic situation is becoming more stable.

ECB president Jean-Claude Trichet said the plan to withdraw measures should be executed “in our own view the latest in 2011” once recovery is under way.

Mr Trichet said ministers also discussed the rising value of the euro ahead a meeting of the G7 group this weekend in Istanbul.

“There is very strong sentiment that we have a shared interest in a strong and stable international financial system and excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” he said.

Minister for Finance Brian Lenihan said policy will have to be framed in light of the conclusion that it was too early to say whether the turnaround was the start of a permanent recovery.

Swedish finance minister Anders Borg, host of the meeting, said Europe’s main banks were sufficiently capitalised. A stress test of the 22 largest institutions, not including Irish banks, found their loan losses may total €400 billion this year and next. The test assumed EU GDP dropped 5.2 per cent this year ad 2.7 per cent in 2010.