The European economy can overcome the ongoing turmoil on financial markets caused by the US sub- prime mortgage crisis, the European Union (EU)'s top economic official said on Wednesday.
"The economic fundamentals of Europe are solid, should not be significantly affected by the recent turbulences and are capable of overcoming the ongoing uncertainties," the EU Economic and Monetary Affairs Commissioner Joaquin Almunia told the European Parliament in Strasbourg.
But he warned the impact of the market turbulence could go beyond what we have seen so far, and it was still too early to quantify the possible impact on the real economy as its negative effect on the US economy and market confidence remained uncertain.
Financial markets around the globe have during the past few weeks experienced a serious turbulence sparked primarily by the deterioration of the high-risk mortgage market in the United States, known as the sub-prime market, which generated a liquidity squeeze in the inter-bank market and obliged central banks to inject large amount of money.
Almunia said possible slowdown of the U.S. economy due to the turbulence will have some impact on the rest of the world, in particular in Europe, but the impact should be limited given that Europe's trade is carried out essentially within the EU.
Moreover, the world economy continues to enjoy a high growth rate thanks to the dynamism of the emerging countries, which have been little affected by the recent crisis, he said.
Despite his overall optimism, Almunia acknowledged to the EU lawmakers that the economic growth is not going to exceed the spring forecasts made by the European Commission in May, which predicted 2.6 percent for the 13-nation euro zone and 2.9 percent for the EU this year.
The EU's executive arm is expected to publish its interim economic growth forecasts for 2007 next Tuesday, which Almunia said will give an initial indication of the possible impact of the crisis.
At the same occasion, the EU Internal Market Commissioner Charlie McCreevy assured lawmakers that similar problems are less likely to arise in Europe since the European mortgage market has different characteristics from that of the U.S..
McCreevy said given the spill-over effects of the current crisis, high standards of regulation are necessary throughout global financial markets. He also called for further analysis of valuation of complex securitisized products and market clearing mechanism in stressful market situations.
While clearing hedge funds of their role in the turmoil, McCreevy repeated his criticism of the slow response of credit rating agencies to the crisis.
"It has been alleged that there was unwarranted rating inflation for structured products. The role of credit rating agencies needs to be clearer," he said.