2 July 2009

Sweden tells EU: Stimulus is an unaffordable waste

The European Union’s financial sector faces potential losses so large that the bloc’s governments cannot afford the risk of borrowing more money to boost Europe’s economy, Fredrik Reinfeldt, Sweden’s prime minister, said on Tuesday.

In an interview with the Financial Times marking Sweden’s assumption today of the EU’s rotating presidency, Mr Reinfeldt said his government would guide the 27-nation bloc for the next six months on the assumption that Europe’s financial sector was still not out of crisis territory.

Mr Reinfeldt’s emphasis on the need to halt and then reverse the rise in EU budget deficits and public debts was broader in its implications than the recent warnings of leaders such as Angela Merkel, Germany’s chancellor, because he specifically mentioned the difficulties facing Europe’s financial sector.

“We are warning that we are not through the financial crisis. There is still a financial crisis affecting the financial sector. We have exactly these discussions – what kind of losses are still out there?” Mr Reinfeldt said.

“That’s another reason for me to say, ‘Don’t push on with more stimulus packages, because you might face additional problems with the financial sector.’ ”

According to estimates released last month by the European Central Bank, banks in the 16-nation eurozone face potential writedowns of $283bn (€202bn, £172bn) between now and the end of 2010, mainly to take account of bad loans.

Meanwhile, the multibillion-euro rescue schemes announced for Europe’s banking system, including recapitalisations, debt guarantees, asset swaps and asset relief, will push eurozone public debt to an estimated 83.8 per cent of gross domestic product next year, up from 66 per cent in 2007.

Mr Reinfeldt said Europe’s financial sector was to some extent protected by emergency legislation put in place after the crisis touched its peak last September and October. “We are better prepared to deal with the fact that we might get further financial turbulence,” he said.

Nevertheless, his words echo the concerns of EU policymakers and financial specialists in Brussels, who say they doubt the capacity of many European banks to absorb future heavy losses stemming from the Continent’s worst recession in almost 80 years.

Mr Reinfeldt said it was all the more important for EU governments to restore order to their public finances in the post-crisis era because it would not be long before demographic changes – more pensioners and fewer of the population in jobs – started to put immense pressure on Europe’s welfare state.

Mr Reinfeldt, promising Sweden would push as hard as possible during its EU presidency for a global deal on fighting climate change at a Copenhagen conference in December, said he would do his best to persuade the US and China to sign up.

“We can never reach the global answers we need unless China and the US take the decision to do much more,” he said.

http://www.ft.com/cms/s/0/4a612352-659e-11de-8e34-00144feabdc0.html

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