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Viewing cable 09BRUSSELS1392, EUROPE FINANCIAL AND ECONOMIC REPORT: October 9,

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Reference ID Created Released Classification Origin
09BRUSSELS1392 2009-10-16 14:43 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY USEU Brussels
VZCZCXRO4249
PP RUEHIK
DE RUEHBS #1392/01 2891443
ZNR UUUUU ZZH
P 161443Z OCT 09
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING
RUEHBR/AMEMBASSY BRASILIA
RUEHMO/AMEMBASSY MOSCOW
RUEHNE/AMEMBASSY NEW DELHI
RUEHOT/AMEMBASSY OTTAWA
RUEHSA/AMEMBASSY PRETORIA
RUEHKO/AMEMBASSY TOKYO
UNCLAS SECTION 01 OF 03 BRUSSELS 001392 
 
SENSITIVE 
SIPDIS 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:       October 9, 
2009 
 
BRUSSELS 00001392  001.8 OF 003 
 
 
Upcoming Issues/Events: 
----------------------- 
 
ECOFIN Meeting: 
--------------- 
 
1. (SBU) On October 20, EU27 Finance Ministers will meet in 
Luxembourg.  They are scheduled to discuss: 
--preparations for the November 6-7 G-20 Finance Ministers meeting; 
--exit strategies from measures put in place in response to the 
economic and financial crisis; 
--climate finance; 
--reform of financial supervision; 
--strengthening of EU financial stability arrangements; and, 
--taxation issues. 
 
The ECOFIN will be preceded by a meeting of the Eurogroup. 
2. (SBU) Commission to present proposals on derivatives and 
financial stability: On October 21, the Commission is expected to 
issue two Communications (non-legislative proposals) setting out 
principles for regulation of derivatives and improving crisis 
resolution arrangements. 
 
Recent Events: 
-------------- 
Informal ECOFIN hails stress tests and moves towards reforming 
supervisory architecture: 
--------------------------------------------- ------ 
 
3. (SBU) At the October 1-2 informal ECOFIN meeting in Goteborg, EU 
finance ministers and central bank governors: 
(1) agreed that current signals point to a bottoming out of the 
crisis and that a tentative recovery is underway, albeit fragile and 
uncertain; 
(2) described as positive the results of the stress tests conducted 
on 22 unnamed large EU banks; and (3) failed to reach agreement on 
exit strategies.  ECB President Trichet called for an exit from 
stimulative policies as soon as the recovery starts, while French 
Finance Minister Lagarde noted that an exit would first require a 
fall in unemployment. 
 
4. (SBU) Broad consensus is emerging regarding the need to promote 
financial stability and enhance European financial regulation and 
supervision. The Swedish Presidency announced its commitment to 
reach agreement on the creation of the European Systemic Risk Board 
(ESRB) by October on the European System of Financial Supervisors 
(ESFS) by December. 
 
Stress tests of EU banks produce reassuring results: 
--------------------------------------------- ------ 
5. (SBU) Stress tests of the top 22 banks in the EU (representing 
60% of EU bank assets) found that they could survive "a severe 
macroeconomic deterioration", resulting in 400 billion in credit 
losses in 2009-10 under the tests' adverse scenario.  ECB President 
Trichet noted that, "even with this tough stress testing, we see 
that our system is resisting in a way that's reassuring."  Many 
details of the tests were not made public, however, including 
country-by-country breakdowns or the names of the 22 banks that were 
tested.  EU stock indices showed little investor reaction to the 
tests. 
 
6. (SBU) A statement issued by EU finance ministers and Central Bank 
governors reported that under current EU forecasts for 2009 and 
2010, the largest banks in the region would maintain an average Tier 
1 capital ratio "well above" 9%. A "more adverse" scenario would 
increase losses and cut the average ratio to about 8%. Bank Tier 1 
capital ratio would not fall below 6% for any of the tested banks. 
 
European Parliament establishes special committee on financial and 
economic crisis: 
--------------------------------------------- ------ 
 
7. (SBU) On October 7, the European Parliament voted to create a 
special committee on the financial and economic crisis.  The 
Committee has been given the tasks of: 
(1) analyzing the extent of the financial crisis and its impact on 
the EU and its Member States; 
(2) evaluating the state of global economic governance, and 
(3) evaluating the current implementation of Community legislation 
 
BRUSSELS 00001392  002.6 OF 003 
 
 
in all the areas impacted by the crisis.  The 45-member Committee 
has been established for a period of one year, with the possibility 
of extension, and is expected to produce proposals for the long-term 
reconstruction of sound, stable financial markets.  German Liberal 
Democrat Wolf Klinz is expected to be elected as chairman. 
 
European Parliament resolution supports single financial 
supervisor: 
--------------------------------------------- - 
 
8. (SBU) On October 6, the European Parliament adopted by a large 
majority a joint resolution in response to the conclusions of the 
G20 summit meeting in Pittsburgh.  MEPs welcomed the G-20 agreement 
and the focus on global imbalances and expressed the view that "the 
European Union needs to work towards a stronger financial 
supervisory architecture with a single financial supervisory 
authority as an objective." 
 
Germany to shift banking supervision from Bafin to Bundesbank: 
--------------------------------------------- ---- 
 
9. (SBU) The incoming German coalition has agreed abolish the 
country's two-pronged system for banking oversight by stripping 
Bafin of its mandate and making the Bundesbank the sector's sole 
regulator.  At present, the responsibilities are shared by the 
Bundesbank, which is in charge of macro-prudential supervision, and 
Bafin, which is in charge of micro-prudential supervision.  The 
Bundesbank has also proposed that it receive responsibility for 
insurance regulation.  However, no decision has yet been made and 
the insurance sector is reportedly strongly resisting the Bundesbank 
proposal. 
 
ECONOMICS / FINANCE 
-------------------- 
 
Recent Events: 
------------- 
EC calls for deeper macroeconomic coordination and surveillance and 
argues for stronger international representation: 
--------------------------------------------- ----- 
 
10. (SBU) In its annual report on the Euro area, the Commission 
finds that the euro acted as a valuable shield in the financial 
crisis, increasing the Euro area's attractiveness for non-Euro area 
Member States.  However, the crisis has had a strong negative impact 
on the sustainability of public finances and potential growth - 
which has fallen from 2.5% to 1.0% for 2010-2020 - and may increase 
divergences in Member States competitiveness.  The annual report 
also highlights the risks of intra-Euro area and domestic 
imbalances.  The Commission calls for stronger and broader 
macroeconomic surveillance - to ensure sustainable public finances 
and the implementation of policies to improve potential growth - and 
argues for EU external representation to be strengthened, 
particularly within the IMF. 
 
Commission initiates EDP for nine additional Member States: 
--------------------------------------------- ----- 
11. (SBU) On October 7, the Commission initiated excessive deficit 
procedures (EDP) for Austria, Belgium, the Czech Republic, Germany, 
Italy, Slovakia, Slovenia, the Netherlands and Portugal on the basis 
of projected budget deficits above 3% in 2009.  The Commission noted 
that although the deficit levels are exceptional in nature, they are 
neither close to the reference value of 3% of GDP, nor temporary. 
The procedures are based on fiscal projections submitted to the 
Commission by the countries themselves (April EDP notifications) and 
on the Commission's spring forecasts.  The December ECOFIN will 
decide whether to approve the Commission's recommendation. 
 
ECB and BoE stay the course: 
--------------------------- 
12. (SBU)As expected, on October 8, the European Central bank and 
the Bank of England kept their interest rates unchanged and did not 
announce any modifications to their quantitative easing programs. 
 
Commission proposes 200 million in macro-financial assistance to 
Serbia: 
--------------------------------------------- ------ 
13. (SBU) On October 8, the Commission proposed to the Council 200 
million in macro-financial assistance (MFA) to Serbia in support of 
 
BRUSSELS 00001392  003.14 OF 003 
 
 
its IMF program.  The loan would be provided in two installments, 
tentatively in the second and fourth quarter of 2010, conditional 
upon meeting the conditions of the IMF program.  Earlier this year, 
the Commission agreed to provide 100 million in pre-accession 
budget support grants. 
 
September Euro area inflation down, industrial producer prices up: 
--------------------------------------------- - 
14. (SBU) On September 30, Eurostat said that Euro area inflation is 
expected to be -0.3% in September 2009, down from -0.2% in August 
and 3.6% in September 2008.  August industrial producer prices rose 
by 0.4% in the Euro area, and by 0.2% in the EU27. 
 
Unemployment up, retail trade suffers: 
-------------------------------------- 
15. (SBU) The Euro area unemployment rate was 9.6% in August 2009, 
up 0.1% m-o-m and 2.0% y-o-y.  In the EU27, August unemployment was 
9.1%, up 0.1% m-o-m and 2.1% y-o-y. 
 
16. (SBU)Over the same period, retail trade fell by 0.2% m-o-m in 
the Euro area and by 0.3% m-o-m in the EU27. Year-on-year figures 
showed a 2.6% decrease in the Euro area and a 1.8% fall in the EU27. 
Total retail trade rose in four Member States and fell in thirteen. 
The highest increases were observed in Poland (+1.5%) and Spain 
(+1.4%), while the largest decreases were in Latvia (-3.3%), Sweden 
(-2.7%), Lithuania (-2.3%) and Austria (-2.0%). 
Second quarter GDP estimates revised downward: 
--------------------------------------------- - 
17. (SBU) On October 7, Eurostat released revised estimates for Q2 
GDP growth in the Euro area and the EU27. For the Euro area, growth 
is estimated at -0.2% (versus the previous estimate of -0.1%) and 
for the EU 27 at -0.3% (versus -0.2%).  Year-on-year growth is 
estimated at -4.8% in the Euro area and -4.9% in the EU27. 
MURRAY