EU ministers vow debt cut, trip on bank supervision

LUXEMBOURG Tue Jun 9, 2009 6:13pm BST

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LUXEMBOURG (Reuters) - EU finance ministers pledged on Tuesday to lower public deficits once economic growth returns but proposals for pan-European supervision of the financial sector hit resistance, chiefly from Britain.

Meeting in Luxembourg, ministers from the 27 European Union countries said they agreed no more stimulus spending was needed for now and that budget consolidation should begin as soon as recession is over.

The ministers discussed but made little headway on key parts of proposals for more coordinated supervision of the financial sector. Britain was particularly wary of encroachment at EU level but Germany too raised questions.

From Paris, French Prime Minister Francois Fillon said the European Central Bank should play a central role when it came to cross-border supervision of market risks to general economic stability, and he singled out British reticence.

"Several member states including the United Kingdom still have major reservations on this. Our job is to show them that we can no longer hold back on a system that failed," Fillon told France's lower house of parliament.

The EU finance ministers were under pressure in Luxembourg to deliver on promises that financial markets will be better policed from now on and that national sovereignty will not prevent them from cooperating to do so effectively.

"The situation is difficult," said Czech Finance Minister Eduard Janota, whose country holds the EU's rotating presidency. "It is necessary to coordinate the approaches of national coordinators with a pan-European approach."

HANDS OFF

Britain has long been reluctant to sign up to anything that might open London's financial centre to outside oversight. Tuesday's discussions exposed the difficulty governments will have when they must go beyond declarations on the need to improve regulation and cross-border supervision of banks.

Chancellor Alistair Darling said he was happy with much of the proposal discussed with EU colleagues but could not accept anything that would give European bodies powers to take decisions with fiscal impact at national level.

"There is a principle here -- that taxation is clearly a matter for member states. It is not a European Union matter," he told reporters.

German Finance Minister Peer Steinbrueck also raised questions in comments to journalists about the extent to which pan-European bodies could take decisions that might have a budgetary impact at national level.

The problem is now to be taken up by EU leaders, who meet late next week, Czech minister Janota told a news conference.

At the heart of the debate are proposals made last week by the European Commission, the EU's executive arm. It called for setting up two bodies to enhance financial market supervision.

The first body, the European Systemic Risk Council, would monitor any build-up of risks in the financial system that would threaten its stability. The Commission proposed that the European Central Bank chair this council.

A second pan-EU body would thrash out standards to be applied to day-to-day supervision of banks, insurers and securities markets and, ultimately, its decisions would have binding powers over EU member states.

Defaults in the U.S. subprime mortgage market in 2007 marked the start of a global banking crisis, largely blamed on slack financial sector regulation, which then dragged down the economy.

HEADING FOR THE EXIT

With some data suggesting the worst of the economic downturn may soon pass, the ministers agreed to commit to clean up public finances when recession ends.

"With the economic and budgetary outlook forecasted by the (European) Commission in early May, further budgetary stimulus would not be warranted and attention should shift towards consolidation, keeping pace with economic recovery," said the document they signed, according to one diplomat.

European Commissioner Joaquin Almunia, whose job is to see that governments comply with the debt and deficit limits of the EU Stability and Growth Pact, said on Monday this move may start next year but there was no sign of such a hard commitment on timing from ministers.

Almunia said the way things looked now suggested Europe's economy could start growing again in 2010, probably after the first quarter, and that this would be the right time to begin budget consolidation.

The overall budget deficit of the euro zone is expected to rise to 5.3 percent of gross domestic product this year and 6.3 percent in 2010, from 1.9 percent in 2008, the Commission says.

For the EU as a whole, the deficit will rise to 6.0 percent this year and 7.3 percent in 2010 unless policies change, the Commission has forecast, from 2.3 percent in 2008.

In forecasts issued on May 4, the Commission predicts that the economy of the euro zone and wider EU will shrink by 4 percent this year in the deepest recession since World War Two, after GDP growth slowed to just short of 1 percent in 2008 when the boom years turned to bust.

(Additional reporting by Marcin Grajewski and Anna Willard; Writing by Brian Love; Editing by Dale Hudson/Ruth Pitchford)

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