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Europe

EU Talks Down Euro Zone Split as Ministers Meet in Brussels

EU officials have rubbished talk that the euro zone could split as a result of deepening deficits brought on by the global financial crisis. The comments came on the eve of an EU finance ministers meeting in Brussels.

The Euro sculpture at the European Central Bank in Frankfurt

EU leaders says euro zone unity is unquestionable

At the heart of comments about the single-currency bloc splitting are increasingly divergent interest rates paid by euro governments on their debt.

The difference between interest rates on debt issued through low-risk government bonds in Germany and that of high-deficit euro zone countries such as Ireland, Greece, Spain and Portugal widened last week to the highest levels since the common currency was introduced in 1999.

Euro zone critics seized on the growing strains in bond markets to argue that the bloc would have trouble holding together if this interest rate divergence grew too large.

Almunia: No chance of split

EU Commissioner for Economy and Monetary Affairs Joaquin Almunia

Joaquin Almunia says a spread in interest rates is logical given fiscal differences

But EU Economic and Monetary Affairs Commissioner Joaquin Almunia said Monday that the divergence was not a sign that the euro zone would shed members.

"I am not worried at all by those who have announced for 10 years in a row that the euro area will split. Honestly, I don't think that this is a real hypothesis," he told reporters in Brussels.

"It is normal that the market assess the risks. So the existence of a spread in euro area government bonds is logical because not all members of the euro area have the same fiscal position over the medium to long-term," he said.

The European Commission, the EU's executive, announced Monday that the combined public deficit of the euro zone would swell from 1.7 percent of output to 4 percent in 2009 and to 4.4 percent in 2010. The commission said the blow out would be a result of huge spending packages adopted by some European governments to help stimulate their economies out of the current slump.

As a result, Ireland's deficit is expected to bulge out to 13 percent in 2010 and Spain's is calculated to reach 5.7 percent the same year.

The EU stability and growth pact stipulates that member states must keep their budget deficits no higher than 3 percent of GDP. Multiple warnings are issued before eventual sanctions against offending states are adopted.

‘Long-term debt reduction' the key

German Chancellor Angela Merkel

German Chancellor Angela Merkel has sung the euro's praises

German Chancellor Angela Merkel seized on the deficit figures Monday in an open letter published in a number of European dailies. Merkel said she was concerned that rising public debt could undermine euro zone stability.

"In a period of deep global degradation like the one we are going through, the single European currency is a priceless source of stability and security," Merkel wrote.

"If we didn't have the euro, the first lesson we would have taken from this crisis is that we would need to create it as quickly as possible.

"This is why Germany will continue to deliberately make the rules of the European growth and stability pact its own," she continued.

"In order to meet its national responsibility, the federal government has decided, in addition to having a plan to repay its debts, to lock long-term debt reduction into the German constitution."

Brussels review of crisis

A stock trader reacts at the Frankfurt stock market

Brussels is still trying to get its head around the financial crisis

On Tuesday, EU finance ministers met in Brussels to discuss how to mitigate what has become one of the bloc's sharpest economic downturns in decades.

The commission had only a day earlier issued fresh economic forecasts predicting a 1.8 percent drop in the EU's gross domestic product (GDP) this year. GDP in the 16-member euro zone, which excludes many fast-growing countries from Eastern Europe, is set to shrink by 1.9 percent.

The finance ministers were to focus on the implementation of the various economic recovery plans that have so far been put together by national governments.

Officials in Brussels said 18 such plans, totaling 190 billion euros ($250 billion) over the next two years, have so far been submitted to the commission.

By far the biggest stimulus package -- 82 billion euros spread over 2009 and 2010 -- belongs to Germany, the bloc's largest economy.

Luxembourg Prime Minister Jean-Claude Juncker said after a euro group meeting held late on Monday that "no minister called for a further increase in the measures decided so far."

Austrian minister: Worst yet to come

But EU ministers meeting in Brussels were clearly concerned, with Austrian Finance Minister Josef Proell saying the feeling among his colleagues was that "we are heading towards the peak of the crisis."

According to the commission's forecasts, EU GDP is set to move into positive territory again in 2010, but as many as 3.5 million jobs could be lost in the process.

Ministers also expressed disappointment that one of the underlying causes of the economic downturn -- the global credit crunch -- was still far from being resolved.

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