EU confident of avoiding slump

Alogoskoufis says Greece hopes to prevent imported inflation from causing domestic spiral

Economy and Finance Minister Giorgos Alogoskoufis (left) with his Irish counterpart Brian Cowen at the Ecofin meeting in Brussels yesterday.

By Constantinos Kallergis - Kathimerini

BRUSSELS – With an eye on the financial crisis that has developed in the United States in recent months, the European Union’s finance ministers conferred here over the last two days, under the central slogan “Europe is not America.”

To be sure, the exact message that Ecofin yesterday and the narrower Eurogroup council (eurozone ministers) on Monday intended to convey was that the European Union must avoid being dragged into the recession that is knocking on the door of the American economy, even if its now projected performance for this year and 2009 lags considerably compared to earlier forecasts.

Economic and Monetary Affairs Commissioner Joaquin Almunia said that it is the USA, not the world economy, that is facing the specter of recession, adding that the root of economic problems on the other side of the Atlantic lies in the huge dual US deficit, afflicting its trade and budget, of which the EU has neither. And he advised the USA to reduce its deficits, giving substance to his view as to why Europe is not facing the same risks.

Eurogroup President Jean-Claude Juncker argued that the European economy is not as dependent on the USA as it used to be, and said the EU’s Stability and Growth Pact, revised and more flexible, provides the governments of member states with the tools and the leeway to prevent the now inevitable slowdown from developing into a recession. Such leeway is afforded by the possibility of exceeding, temporarily, the cap on fiscal deficits of 3 percent of gross domestic product which is envisaged for crises such as the current one.

A recession is considered the contraction of economic activity for two quarters in a row.

“There are indications that in Europe we may have passed the top of the last upward phase of the economic cycle, but this does not provide any reason for the direction of economic policy to change,” said Greece’s Economy and Finance Minister Giorgos Alogoskoufis.

He noted the danger of inflation, especially for Greece, stressing that priority now had to be put on preventing the development of imported inflation – due to rising oil and raw materials prices – into an internal structural problem of the Greek economy.

“The key is to prevent the so-called inflationary spiral, where rising prices lead to wage rises, in turn fueling further price rises and so on, with obvious unpleasant consequences,” Alogoskoufis said.