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EEAG experts: European economy will take a year to recover
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08:25, March 27, 2009

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GDP growth in the euro area will expand again in 2010 at a slow pace of 0.2 percent due to private consumption and government spending, according to economists from the European Economic Advisory Group.

John Hassler, professor of economics at Stockholm University, said at EEAG's annual report release seminar on Wednesday that most countries of the European Union have been hit by the worldwide recession. The economy in the euro area will contract by 2 percent this year. Unemployment will continue to rise and the recession will be seen in the whole western world.

According to the report, due to its dependency on exports, Germany in comparison to other countries will be particularly hard hit by the recession. German economy will contract by 2.4 percent, which without the economic stimulus package of the German government would have amounted to 3.2 percent.

Unemployment in September will be half a million higher than in September 2008 and will rise considerably into the winter. Because of cautious wage settlements in the past years German workers were able to improve their competitiveness somewhat so that the impact on the labor market in 2010 will presumably not be as strong as in 2005.

The 8 economic experts who compiled the report have also made policy recommendations for dealing with the current financial crisis centred around the regulation of financial institutions and international financial market structures.

They recommend that minimum capital reserve requirements should be clearly raised and extended to all bank-like institutions. A refined definition of value at risk should be introduced that includes high liquidity premiums and stock market bubbles. The experts also recommend a common financial market regulation system and a supervisory body at the European level.

"Europe needs a common system of financial regulation and supervision. The European System of Central Banks should assume an explicit role of guarantor of the system, acquire supervisory powers over European groups and coordinate with national central banks and financial intermediaries," says the report.

Professor Hassler said that rating agencies are paid by issuers but not buyer, thus rating system was flawed. He said transparency is the key to get quality borrowers.

The crisis has rekindled the on-going debate over types of financing. In addition to the many innovations that have been introduced in the past two decades, especially the private equity firms have been subject to increasingly critical examination. The EEAG sees no systemic risk from these firms. Economic systems need different types of capital, and public regulators should let the market decide as to what sources are most adequate for the firms.

According to the report that Asian markets have so far played a stabilizing role in the current crisis while the EU and America made negative contributions to the world economy.

By Xuefei Chen, People's Daily Online correspondent in Stockholm.

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