Euro ministers flag debt fears in recession time

BRUSSELS Jan 19 (Reuters) - Euro zone finance ministers voiced fears about running up debts when they met on Monday to discuss the costly government response to recession and the prospect that unemployment will rise 25 percent or more by 2010.

As they met, Britain, which remains outside a currency club now shared by 16 neighbours, announced further plans to help a crisis-hit bank sector by offering, among other things, insurance against losses on rotten assets.

No such plans have been hatched by any countries in the euro currency zone. Neither Germany nor France seemed from initial reactions to be in a rush to replicate London's move, the second in three months to deal with a global financial crisis qualified widely as the worst since the Great Depression of the 1930s.

The predominant message from those who spoke as they entered the talks in Brussels was on fiscal stimulus generally -- that governments needed to spend public money trying to limit the recession but had to avoid running too deeply into debt.

"We should not only think of ways to stimulate the economy but also how to pay the bill, and how to make sure we all move back to sustainable paths for our finances," Wouter Bos, Dutch finance minister, told reporters.

"This biggest worldwide economic crisis arose by getting into debt," Josef Proell, Austria's new finance minister, said.

"You can't fight a debt crisis by getting into more debt. That's why we need to proceed very carefully.

German Finance Minister Peer Steinbrueck reiterated Berlin's attachment to respecting European deficit control rules as much as possible.

The ministers, to be joined on Tuesday by their colleagues from the European Union countries not using the euro, met hours after the European Commission forecast the euro zone's first full recession this year since its establishment 10 years ago.

Germany, after initial hesitation, has announced additional government plans to spend 50 billion euros ($65.7 billion) this year and next in an attempt to boost demand and limit recession. France has unveiled plans for 26 billion euros in stimulus.

The European Commission, the European Union's executive arm, is urging the 27-nation EU as a whole to come up with a total of 200 billion euros, or 1.5 percent of gross domestic product.

DIRE PREDICTIONS

In updated economic forecasts published on Monday, the Commission said it expected gross domestic product in the euro zone to fall 1.9 percent in 2009, and grow by only 0.4 percent in 2010, after an expansion of 0.9 percent for 2008.

It forecast that 11 euro zone countries would be in recession in 2009, against two in 2008. Ireland would be hit the most, contracting by 5 percent, with the biggest economy, Germany, coming second with a GDP drop of 2.3 percent.

"The figures agree with the ones we will probably present in our latest economic outlook on Wednesday," Germany's Steinbrueck said on arrival in Brussels.

The Commission, which said the economies of Italy and Spain were expected to shrink 2 percent, Belgium 1.9 percent and France 1.8 percent, also predicted a surge in euro zone unemployment, to a rate of 10.2 percent in 2010.

That is equivalent to 15.9 million jobless and a rise of 3.7 million from the 12.2 million unemployed in November, the latest month for which official data are available and when the jobless rate stood at 7.8 percent.

In Britain, which pumped 37 billion pounds ($53.6 billion) of public money into the banks in October, the government announced new steps on Monday and said it would now allow banks to insure themselves against losses on their riskiest assets.

In Germany, Finance Ministry spokesman Torsten Albig said the government planned no further assistance for the financial sector.

"There are no plans at the moment," he said. "But I think that considering the measures that could be done, we're ahead with what has been implemented in Germany."

And French Economy Minister Christine Lagarde, interviewed by Reuters on her way to the meeting in Brussels, said:

"French banks are not at all in the same situation as the British banks, thank goodness." (Writing by Brian Love, with additional reporting by Marcin Grajewski, Francesca Landini, Ilona Wissenbach, Julien Toyer, Jan Strupczewski and Dave Graham; editing by Dale Hudson)