EU Agrees on New Rules to Quell Financial Crisis | Business| Economy and finance news from a German perspective | DW | 04.04.2008
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EU Agrees on New Rules to Quell Financial Crisis

EU finance chiefs agreed Friday on broad rules for cooperation across borders to avert financial crises but insisted that Europe's banks were sound despite the current turmoil in the sector.

A man with an EU-flag umbrella

Things aren't looking too bright in Europe at the moment

The European Union wants to set up official monitoring bodies to keep an eye on internationally operating banks and insurances, sources close to the Slovenian EU presidency said Friday.

"We have signed a memorandum of understanding on financial stability and cooperation in order to ensure stability," said Slovenian Finance Minister Andrej Bajuk after chairing a meeting with EU finance ministers and central bankers in the city of Brdo.

Under the agreement, public bailouts would be sought only if an institution's troubles threatened the broader economy and there there were no private sector solution, according to the agreement.

"The use of public money to resolve a crisis can never be taken for granted and will only be considered to remedy a serious disturbance in the economy," the document says.

"The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses," it says.

European Central Bank President Jean-Claude Trichet said that European central banks' assistance to troubled institutions was limited to situations "where there is a liquidity problem and not a solvency problem."

Minister cautions against "hysteria"

Arriving in the town of Brdo to meet with his colleagues on Friday, April 4, German Finance Minister Peer Steinbrueck said that there was no point in getting too worked up over the current problems.

"It's going to keep us busy throughout 2008, but I advise against getting hysterical about it," Steinbrueck told reporters.

Along with a record-strong euro, the bloc is also faced with sky-high inflation, which rose to 3.5 percent in March, the highest level since the euro zone was formed in 1999.

While saying that the situation was likely to get even worse, Luxembourg's Premier and Finance Minster Jean-Claude Juncker also tried to look on the bright side. He said that the International Monetary Fund's decision to lower the euro zone's growth forecast to 1.3 percent for 2008 was "too pessimistic."

But Juncker, who also heads the group of euro zone finance ministers, said that he did expect the EU Commission to also lower its forecast from the current level of 1.8 percent.

Structural problems

A euro sign outside the European Central Bank's headquarters

Is the ECB partially to blame?

Slovenia's finance minister, Andrej Bajuk, whose country currently holds the EU presidency, meanwhile said that there definitely was concern about the current inflation within the bloc.

"The changes that we are now seeing seem every day more of a structural nature than just a question of short-term development," he said.

Jean-Claude Trichet has said that employers, including governments, should keep wage hikes moderate to avoid further inflation, according to AP news service.

Is ECB the problem?

A hand filled with euros is seen in front ot a vegetable stand

Europeans keep getting less for more euros

The head of the IMF, Dominique Strauss-Kahn, on the other hand said that believes the real problem of the euro, as well as being overvalued, is the all powerful position of the European Central Bank.

In Monday's edition of Le Monde, Strauss-Kahn said "the problem of the euro is that the European Central Bank, which has worked well to contain inflation, is all powerful."

"There is no counterweight in the shape of a real European finance minister who would be tasked with ensuring growth," he told the newspaper.

There have been persistent calls, especially in France, for the ECB to cut interest rates to bolster a slowing economy, but the bank has insisted that inflation remains the main threat and lending costs must remain high as a result.

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