Europe takes steps to tame debt crisis

12th May 2010, Comments 0 comments

Europe took steps Wednesday to tame its debt crisis as Spain announced deep cuts to public sector salaries and Brussels sought unprecedented powers to scrutinise national budgets.

At the same time, market sentiment was buoyed by positive European growth figures as several states came out of recession, including Spain, which has been under pressure to cut its deficit to avoid contagion from the Greek debt debacle.

The European Commission, responding to a Greek crisis partially reflecting its own weak oversight, called on European governments to submit their national budgets to the EU for review before presentation to national parliaments.

"An early peer review of fiscal policies would help shape a fiscal stance for the EU and the euro area as a whole," a commission statement said.

Sweden said it opposed the proposals but the chancellor of EU powerhouse Germany, Angela Merkel, said they were a "step in the right direction" and she was unfazed by the EU plans to vet state budgets.

The ballooning public deficits and debts of eurozone countries have been under massive scrutinity since the Greek crisis erupted earlier this year, which has undercut the value of the euro and rattled world markets.

The European Union teamed up with the International Monetary Fund this week to create a trillion-dollar rescue scheme aimed at shoring up weak eurozone economies but governments still need to tackle their budgets.

In a tough new austerity measure, Spanish Prime Minister Jose Luis Rodriguez Zapatero ordered a 5.0 percent public sector wage cut.

"It is not easy for the government to approve" these measures, he said, adding that belt-tightening would have "an obvious social impact" in a country already struggling with 20 percent unemployment.

Spain, saddled with the eurozone's third largest public deficit and seen as vulnerable to the sort of fiscal turmoil afflicting Greece, said it had eased out of recession with growth of 0.1 percent in the first quarter.

The 16-nation eurozone as a whole managed growth of 0.2 percent in the first three months after having stagnated in fourth quarter 2009, the EU said.

Throughout the 27-nation European Union, which includes non-euro giants Britain and Poland, the first quarter also showed 0.2 percent growth.

Greece at least halted its downward slide with a contraction of 0.8 percent in the first quarter, the same as in the last quarter of 2009.

"The figures were quite good. They were better than expected," said Constantinois Verge, an analyst at Cycle Securities in Athens, adding that the performance was partly due to reforms to curb Greece's rampant black economy.

Greece was also preparing to receive a much-needed first dose of 5.5 billion euros from the IMF under a 110-billion-euro bailout loan agreed with the EU and IMF in exchange for harsh austerity cuts.

"It should be sent by the end of the day to the Bank of Greece," a finance ministry source told AFP. The finance ministry has said it expects a further 14.5 billion euros early next week from the EU.

The German economy, Europe's biggest, grew by a modest 0.2 percent but exceeded forecasts for no growth at all as it struggles out of its deepest post-war recession.

"It's a recovery, not a stagnation," ING senior economist Carsten Brzeski commented.

Portugal, another eurozone member seen as a weak link, expanded 1.0 percent in the first quarter as the government successfully raised one billion euros (1.27 billion dollars) via the sale of 10-year sovereign bonds.

Hungary too announced it had put recession behind it, with its economy expanding a better-than-expected 0.9 percent in the first quarter.

But the news was not uniformly upbeat.

France's growth figure was lower than forecast, at 0.1 percent, leading the state statistics agency INSEE to recalculate the public debt to a record 78.1 percent of GDP.

Austria said its recovery had stagnated and Romania was still stuck in recession.

But the good news that there was managed to shore up European equities, as did a new government in London.

Frankfurt's DAX 30 jumped 2.56 percent and the Paris CAC 40 added 1.67 percent in afternoon deals following recent sharp losses.

London was up 1.03 percent as investors digested policy lines of new Prime Minister David Cameron's coalition government.

Wall Street opened higher as investors welcomed the positive eurozone growth figures, analysts said.

But the euro was still under pressure, easing to 1.2667 dollars in London morning trade from 1.2672 dollars late on Tuesday.

In commodity trading, persistent eurozone debt fears pushed gold to yet another record high, 1,245.07 dollars, in late morning deals as many investors sought a safe-haven investment.

In Asia, Tokyo fell 0.16 percent, Shanghai lost 0.94 percent and Hong Kong rose 0.33 percent on bargain-hunting.

© 2010 AFP

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