EU finance ministers have half-heartedly supported the broad terms of a proposed EU plan to fight off the ongoing recession, but removed references to the €200bn figure initially put forward by the European Commission. After early opposition, German Chancellor Angela Merkel pressed by UK and France moved to support a planned EU-wide stimulus package at a lower figure of €130bn. The 27 EU countries are tsked to give away 1% of their GDP to contribute to a Europe-wide economic stimulus package, including loans for automakers, to jump-start the economy and weather recession. MEPs are now working on a resolution to press European Council & European Commission to adopt EU bonds as an alternative financial resource to fund key European projects as part of the European Recovery Programme. "A quantum step needs to be taken to upgrade and adapt the structure of financial oversight in the EU," argues Karel Lannoo, CEO of the Centre for European Policy Studies (CEPS). Recent comments by European Central Bank President Jean-Claude Trichet and EU Monetary Affairs Commissioner Joaquin Almunia at an economic committee of the European Parliament on Monday 8th December provide a concise summary of the condition of the European economy and monetary and fiscal policy settings. The EU's institutions have under ECOFIN direction given first priority to mitigating the financial sector crisis. Following the G20 Washington agreement and statement of tasks for building a new global financial & economic stability architecture around the IMF (for a new Bretton Woods system) and FSF (BIS's forum for financial regulators and standards bodies) on strengthening prudential regulation, the EU's Council of financial ministers (ECOFIN) stated that “…until financial stability has been fully restored, actions related to resolution and management of financial crisis remain the top priority within the EU”. Europe accounts for a third of the world economy and an even larger share of global financial services. It is not yet pulling its weight globally, ery much less so than the similar sized N.America.
Critical to the EU's and member states responses are the actual economic performance of the Union and views on the main economic risk factors. Within the aggregate performance of the European economy there are distinct variations among member states. Hence, the Commission has temporarily relaxed the fiscal rules for budget settings (in ratio to GDP) allowing at least 8 members to breach the 3% ratio to GDP Maastricht ceiling on budget deficits. At the Community level the Commission is bringing forward spending plans and delivering a general GDP boost on top of the various actions of member states. For the Eurozone, the ECB has cut the central bank rate to 3%. 
Commissioner Joaquin Almunia reported, "Given the speed of change we want to deliver an up-to-date economic forecast on the 19th of January, which is when the Eurogroup will meet on the eve of the next Ecofin meeting, and of course member states should bear this in mind. They should be looking at the effectiveness and the degree of the fiscal stimulus packages adopted by member states... According to our estimates, we have an impact (from fiscal stimulus) in 2009 ... of 0.8 to 0.9% of GDP in the euro zone and member states of the EU... Eighteen member states have adopted fiscal plans more or less in line with the (European) Commission plan." This adds to fiscal stimulis at member state levels expected for 2009 ranging from 8% deficit spending by the UK to others more typically in the 2% to 5% range. This amounts to a shift within the EU towards more 'endogenous growth impulse', which has a global importance, but also especially for non-EU Europe and Africa. The EU has an immense responsibility for its neighbouring states such as in he Mediterranean Area and its traditional economic hinterland including newly liberalised states in Central Europe, which are also 'economic partner' or 'accession states'.
There is also concern for recent accession states, for example when Joaquin Almunia says, "Yes, it's possible that the (European) Commission may need to pay greater attention to the economies of the Baltic states. Particularly when they have difficulties like they have right now... If we are going to say that there is a region in Europe that really needs our attention, the attention of the economic services of the Commission ... it is precisely the Baltic region right now." Jean-Claude Trichet, Governor of the ECB, with responsibility for Eurozone monetary policy (on top of actions by member states central banks) added to this by saying, "One of the consequences we are experiencing is that the capital has a tendency to go back to its headquarters. It's true at the global level ... it's true for all kinds of capital and it's true for the emerging world in general." This refers to the repatriation of investment funds from emerging markets back to Europe and especially to the USA, one reason for the strengthening dollar. The dollar's rise against the Euro is a major factor in the fall of the oil price on top of falling energy demand. The sharp fall in the oil price has reversed inflation expectations of only a few months ago when commodity prices rose sharply. The sensitivity of this is one reason why Trichet says, "I will not comment on the exchange market. As you know, we are in a floating exchange rate system." But, experts generally expect the dollar's rise to halt and reverse sometime during 2009, possibly before the US economy is expected to respond positively to an 8% fiscal stimulis by third or fourth quarter of 2009 and regain some positive GDP growth.
On monetary policy factors, Trichet commented, "It is true that all central banks are saying that their mandates ... are to deliver price stability... measured by the CPI. No central bank in the world would say they are targeting the asset prices, for a very large number of reasons. We do not think it would be reasonable to embark in this avenue. We have ourselves a concept of monetary policy based on two pillars: an economic analysis on the one hand and a monetary analysis on the other. The economic analysis looks very much like what you would do if you were an inflation-targeter. The monetary examination which is the strong tradition of the central banks that created the ECB ... drives you to take into account the evolution of credit, the fact that credit would gallop is something we would interpret as dangerous for price stability in the medium to lon term, and that has also an impact on asset inflation." There is of course a problem here insofar as different EU states have experienced sharply divergent domestic asset inflation, reflected in their GDP growth rates.
Trichet does not explicitly prioritise the ECB's role and responsibility for financial sector stability or the current concern (underlined by G20) about 'pro-cyclicality' in bank lending i.e. banks amplifying the economic cycle by reducing credit to businesses and households in the downturn. He alludes to this implicitly by saying, "Financial institutions should avoid excessive short-termism in their behaviour." Trichet envisages Europe's self-confidence and global position as a relying on its effectiveness as a 'stability anchor', "We really trust ... that by being a solid anchor of stability, an anchor of confidence, by solidly anchoring expectations and particularly price stability in line with our definition ... then we are paving the way in various circumstances ... for the functioning, as smooth as possible, with the real economy behaving as well as possible." This is arguable, given the EU Eurozone's decade of low growth during the single-currency transition period and its weakness in these years in delivering a growth impulse to other countries in the European and African regions. Five years after the Euro's introduction (in line with internal Commission economists' prediction) the Eurozone economy began a more positive growth recovery (much of it however merely export-led). Fastest growth in Europe was enjoyed by those economies that permitted large credit-boom endogenous growth impules, such as UK, Ireland, Spain and Greece. Asset bubble meltdown (and the financial crisis) has wiped out that difference. Italy, Ireland, UK and others are technically in recession - in Italy's case ironically because it was the least credit expansionery.
Low growth now is for different reasons. Trichet says, "Even without the financial crisis, we would have had a slowing down in the economy after long years of very active growth at the global level [though not long years in the Eurzone] and after the oil shocks that we had to cope with, and they had a very powerful depressive effect on every economy in the world." When the credit crunch worsened over the past two years the risks faced by banks looked like this graphic. In the next two years this pyramid will invert as economic and government aid become the dominant risk factors, possibly already the case.
Europe's banks and finance sectors generally are proportionately fully impacted by the financial crisis. This is of course because finance is intensely globalised, beginning with globally interconnected capital and securities markets. Trichet says,"I think what is very, very important is that we not only prevent the banking sector from very, very dramatic difficulties, which was the case clearly after September 15 [Lehmans bankruptcy], but that we permit as soon as possible a system to function on a more normal basis." September is also when stock markets began falling dramatically and credit ratings agencies downgrades of credit assets had fed more fully through to banks' balance sheets, and when recession was accepted as imminent for the EU.
There is over a decade of history (political argument) concerning whether first the Commission, EBRD, and now ECB, should be allowed to delier fiscal boosts by issuing large amounts of bonds (backed by all member states). Trichet kicks this ball into touch by saying, "We are not ourselves in favour of issuing securities, treasuries that will be joint and several. We consider it is good that each particular state, each particular treasury has its own refinancing and has its own way of being on the market." But, this does not rule out short term treasury bills (maturity less than 1 year and hence 'off balance sheet'), "We have to permit the commercial banks to refinance themselves in an appropriate fashion, taking into account the tensions that we are still observing in general and (in the) money market in particular" and "We have also to protect the integrity of the ECB and the integrity of the institutions." This reflects the abiding concern of whether the ECB as a supra-national central bank can effectively support the integrity of the Euro, given that it can only do so via its Euro member national central banks. trichet said, "Each central bank in the world is doing what is deemed appropriate, taking everything into account... As regards the interbank rates, we were providing liquidity ... We have been extremely forthcoming in providing liquidity at fixed rates." 
Note that it is the Commission's direction that liquidity assistance to banks experiencing solvency risks should be at marginally penal rates conjoined with substantial balance sheet restructuring (i.e. asset reduction or deleveraging). "A large part of what we are doing in refinancing the commercial banks is designed to permit progressively to diminish those rates. And I would agree that they are too high on both sides of the Atlantic and both sides of the Channel and we are all doing what we can." Three month interbank funding remains stubbornly expensive (very wide spreads) indicating a very unbalanced (or or 'one-way') money market between lenders and borrowers, a lenders' market. Trichet sees the quarter on quarter recent falls in Eurozone GDP much due to this, to financial turbulence, not just commodity price inflation, "Turning to economic development, since September, there has been an intensification of and broadening of the financial turmoil contributing in the third quarter to a contraction of 0.2 percent in real GDP growth compared to the previous quarter." 
This remains the main problem now that, "Unexpected further declines in commodity prices could put downward pressure on inflation." But, like a good broker of 2-way signals, he adds, "while upside risks to price stability could materialise if the fall in commodity prices were to reverse", which is surely not imminent until after the dollar exchange rate should again show a trend fall. On the world economy, he says, "Global weakness and very sluggish domestic demand can be expected to persist in the last quarter of 2008 and in the next few quarters. Subsequently, a recovery should gradually take place, supported by the fall in commodity prices and assuming that the external environment improves and financial tensions weaken. This outlook remains surrounded by exceptionally high uncertainty, risks ... lie on the downside." The controbersial aspect of his choice of words centres on 'external enironment' whereby Trichet appears wedded to looking for external not internal growth impulses. That is the dominating weakness of the (political) balance in the EU between fiscal and monetary policies. It is valid to ask 'what is the benefit and purpose of an enlarged EU into a major global economic bloc, a regional powerhouse, if it cannot deliver a substantial endogenous growth impulse just when the world most needs this?' This is a question that is holistic and for all EU institutions, not just the economic ones.
Trichet ended his statement by returning to the core of the ECB's mandate, "With lower commodity prices and weakening demand, annual inflation is expected to be in line with price stability over the policy-relevant horizon." It is worth asking, given the G20 agreement and statement emphasising the importance on all of the world's financial sector to act counter-cyclically (or at least neutral and not pro-cyclically), and given Trichet's own warning that it is important for banks not to behave in short-termist ways, why this cannot be more explicitly applied by the ECB. Other financial authorities are asking the same pointed question?The answer of course is that the ECB's hands are tied by its mandate and also by its lack of long term debt issuance capacity. ECOFIN and the Commission, in the light of the G20 aims and objectives, should actively consider adding to the ECB's aims and objectives and resourcing it appropriately, especially if the much vaunted new global financial stability architecture is to deliver for the long term, for all of the 21st century benefit. Europe risks the same approprobrium globally that once attached itself to Marie Antionette's reported quip "let them eat brioche!"
Similar resource constraints limit what the European Commission can achieve. In the interest of pan-Euroepan equity, Lamafalussy Process (single market), and for righting imbalances across the EU, the central institutions of the EU should in some way be facilitated to deliver economic support closer to the scale possible in the USA. This has to be an ECOFIN policy decision, but is as fraught with political obstacles and practical problems as fishing policy. 
EU governments have so far pledged fiscal stimulus plans via Commission programmes worth only 0.8-0.9% of the bloc's GDP, below the level the Commission hoped for, an opinion clearly stated by EU Monetary Affairs Commissioner Joaquin Almunia. "It does make some progress but we do not reach the progress we hoped for," adding that 18 of 27 member states hae fiscal programmes to mitigate recession. This is on top of The Commission's proposal a month ago that the EU's overall fiscal boost schemes should be worth 1.5% of GDP, €200bn ($259bn)in a plan now backed by EU finance ministers. Germany's coalition government is especially divided on whether or not to back proportionate fiscal measures. In some respects Germany's feet-dragging on this within the EU reflects the EU's external weakness. Possibly alluding to Germany, Almunia said some member states had been refusing significant fiscal boosts if these were to benefit other countries rather than only themselves. "I heard one (EU) minister saying he does not want a fiscal stimulus plan that would benefit others. I think he was missing the point," Almunia said. But, I would judge that the UK is also reluctant at the EU-level if only less so, even if UK officials joined the French in commenting that Germany is not making enough fiscal effort to overcome the economic downturn - a point underlined when Angela Merkel was not inited to a mini-summit in London yesterday with Manuel Barrosa. The UK (and Ireland), with half of the EU's banking assets, has less to gain economically and directly from EU fiscal stimuli compared to what it gains from fiscal measures in the USA. In the past, the UK stance was conjoined with Germany's in restricting growth in the Commission's financial resources. Now, Germany's continued stance merely undermines the UK's belief in the power of the EU to act decisively compared to the patently far more decisive action at much larger scale of the USA.
UK's banking sector is very much more trans-atlantic than pan-European. But it nevertheless shares the same concerns as Europe, expressed by Almunia when he says European banks must soon start offering credit to companies and households at affordable rates or governments will alter the conditions under which they inject capital into the banks. This is a very imposing statement. "We need to put pressure on banks to continue lending to companies and households at affordable rates, this is what the capital injections and state guarantees were meant to achieve." The European Commission approved France's bank rescue scheme yesterday (8 Dec) and said it expected similar deals with Germany, Austria and others in coming days, signalling an end to a weeks-long standoff. Denmark announced support for its banks to replace capital lost by the credit crunch, but without moves to nationalise any banks. Sweden said the new guidelines from the EU executive are insufficient. The new EU Competition Commissioner Neelie Kroes said she'd not compromised EU aid rules under political pressure, adding that France has tightened the terms under which banks must pay back aid and that Germany needs to make "minor changes" to secure approval for support to Commerzbank. "You will see that as far as state aid rules are concerned, no concessions have been made," she said. The Commission also expects soon to ease rules for state aid in general by raising the threshold under which it had to be notified of such schemes.
The price exerted on banks for state aid is a hefty 8% on average, plus pressure for the early repayment of state capital and extra safeguards to ensure bank lending feeds into the real economy.Commission approval puts an initial ceiling of €21bn on French bank aid. This is small, compared for example to Sweden's 1.5bn crowns ($182bn). Banks are encouraged to repay loans early as they face higher repayments from the second year. These are mutually conflicting conditions, and do not comply with the G20 ambition or that of financial regulators to dissuade banks from behaving pro-cyclically short term!
