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News : EU Economy Last Updated: May 19, 2011 - 7:28 AM

Brussels Economic Forum: Gurría says most risks to global economy on downside; Schäuble says no crisis of euro but crises in individual countries
By Finfacts Team
May 18, 2011 - 3:53 PM

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German finance minister, Wolfgang Schäuble, is on the near right. In 1990, the then federal interior minister survived an assassination attempt.

Brussels Economic Forum: Almost all the risks to the global economy are the downside, Angel Gurría, the head of the Organization for Economic Cooperation and Development (OECD) said Wednesday. Also in Brussels, Wolfgang Schäuble, German finance minister, said "we are not experiencing a crisis of the euro, but various crises in individual countries that belong to the Euro area."

"The outlook is surrounded by risks,"  Gurría said at today's forum. "Unfortunately at this stage, most risks are on the downside," he said, referencing further increases in commodities could feed into core inflation.

The secretary-general said risks included the effects of Japan's tsunami on the world economy, the risk of a deeper slowdown, an "unsettled" fiscal situation in the United States, risks in some housing markets and possible "pending surprises" from financial institutions, particularly in Europe.

"Our concern is that the downside risks interact and their cumulative impact could weaken the recovery significantly, possibly triggering stagflationary developments in some advanced economies," Gurria said.

Gurría warned that the Eurozone's pace of growth over the next 15 years will be around half of what it was in 1995.

Wolfgang Schäuble, the German finance minister, gave a lecture in memory of Tommaso Padoa Schioppa, a former finance minister of Italy and a founding executive board member of the European Central Bank. who died last year.

Dr. Schäuble said: "The first point I want to make is that, at the heart of the matter, we are not experiencing a crisis of the euro, but various crises in individual countries that belong to the Euro area. These crises were caused by the individual countries’ erroneous economic and fiscal policies, as in the case of Greece, or were caused by a banking system going off the rails, as in Ireland.

Let me repeat that: We are faced with sovereign debt crises in individual countries, and not with a currency crisis. This is demonstrated by the simple fact that the external and internal value of Europe's common currency – despite all the turbulences – has remained impressively stable."

He said he is convinced that we cannot do away with the threat of higher interest rates for spendthrift states. If we did, it would shut down the premise by which the Stability and Growth Pact operates. "Besides, I firmly believe that it would be a disastrous signal to send to the financial markets. They would immediately interpret it as meaning the euro would now cease to be a stable currency. For this reason, I am convinced that we cannot do away with the threat of higher interest rates for profligate states."

The finance minister said that putting all the blame for what went wrong on financial markets would be convenient, but far too easy. Because it is also true that the financial crisis of 2008 and the ensuing recession can only go so far in explaining the high levels of indebtedness of some Eurozone countries. The inconvenient truth is that a number of European countries lived well beyond their means over the past decades.

Dr. Schäuble added: "It is worth remembering that the European Monetary Union was not intended to be a quick fix for Eurozone members or ‑ -  for that matter ‑ - a get-rich scheme for financial speculators. It was not meant to be a system of redistribution from richer to poorer countries via cheaper borrowing for governments by means of common Eurobonds or outright fiscal transfers. European Monetary Union won’t succeed if a number of countries persistently run deficits and weaken their competitiveness at the expense of the euro’s stability."

At today's forum, Angel Gurría said it is ''not logical" that Ireland should pay a higher or onerous interest rate for its bailout.

Speaking to RTÉ News he also rejected the notion of a quid pro quo from Ireland relating to corporate tax in exchange for a lower interest rate.

"In the end countries which are in trouble have to be supported in terms that are consistent with their ability to pay.

"It's not a very great logic for a country applying the (EU-IMF) adjustment programme to be kept at higher or more onerous interest rates. That only makes things worse,"
he said.

Greece Deficit and UK's Market Reaction: The IMF's mission chief in Athens makes comments today on Greece's debt. Insight on how the markets will react, with CNBC's Ross Westgate and Carolin Schober:

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