EU official: market turmoil threatens recovery

BRUSSELS (AP) — Turmoil in global financial markets threatens the economic recovery in the European Union, the bloc's top economic official said Monday.

The warning from EU Monetary Affairs Commissioner Olli Rehn came after a turbulent summer for markets across the globe, as investors worried about a potential new recession in the United States, the eurozone's ability to resolve its debt crisis and the health of European banks.

"The financial markets and the real economy move now more in synchrony, which makes me seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy," Rehn told European lawmakers.

That statement is a sharp turnaround from comments in recent months, when Rehn consistently pointed out that growth in the EU was strengthening despite the market jitters.

As a result, the European Commission now has a somewhat bleaker view of economic growth in Europe than this spring, Rehn said, adding that a new forecast will be released Sept 15.

In May, the Commission, the EU's executive arm and economic watchdog, predicted the 27-country bloc would grow 1.8 percent this year, while the eurozone would expand 1.6 percent.

The European Parliament's economic affairs committee had called Rehn, as well as European Central Bank President Jean-Claude Trichet and Eurogroup Chairman Jean-Claude Juncker, to an emergency hearing on the eurozone's recent problems.
Investor concerns over the currency union have been worsened by delays in implementing both a second bailout for Greece and changes to the eurozone's bailout fund, which were agreed at a summit on July 21.

Eurozone countries remain locked in discussions over a demand from Finland to receive collateral to secure its contributions to the new Greek rescue package.

Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said the collateral issue won't scupper the bailout deal and that he expected a solution within days or weeks.

"The Eurogroup is working on a proposal, which I hope all eurozone member states will be happy with," Juncker told lawmakers.

Rehn, meanwhile, sought to dampen expectations that so-called Eurobonds — debt backed by the entire eurozone — could be a quick and easy solution to the currency union's crisis.

"It is clear that Eurobonds, in whatever form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination," Rehn said.

Such moves "would have unavoidable implications for fiscal sovereignty" and would require "substantive debate in euro area member states to see if they would be ready to accept it," Rehn added, indicating investors should not expect them to be introduced anytime soon.

The Commission is currently working up a feasibility study for Eurobonds at the request of the European Parliament. However, the common bonds have been opposed by several countries, including Germany, the eurozone's biggest economy.

The testimony of the top three representatives of the euro currency project brought no new proposals on how the bloc could finally resolve its debt crisis, which has dragged on for some 22 months.

Juncker, Rehn and Trichet urged governments to speed up the implementation of the second Greek bailout and approve the plan to give new powers to the eurozone's bailout fund, such as the right to buy distressed government bonds to stop countries from sliding further into crisis.

"The fact that markets are dysfunctional is, in our opinion, the responsibility of governments," Trichet said.

The ECB in August reluctantly started buying Italian and Spanish bonds, as the two countries saw their borrowing costs jump amid the wider market turmoil, but Trichet made it clear that he expected the bailout fund to take over that role as soon as possible.

"We expect that the governments themselves will, as they have decided the 21 of July, take the appropriate steps to settling the financial stability in the euro area," said the ECB chief.

While Trichet was speaking in Brussels, the ECB said it bought euro6.65 billion ($9.64 billion) in government bonds last week, down sharply from euro14.3 billion and euro22 billion in the two previous weeks.

__

David McHugh in Frankfurt contributed to this story.