Air of crisis as euro ministers meet

In a temporary building on the windy Luxembourg plateau on Mondy night, 12 finance ministers tried to stop Europe's political turmoil wreaking further damage on the eurozone's economy.

Even before French and Dutch voters said No to the constitution last week, economic problems were piling up for the single currency area. In the aftermath of the shocks, Monday night's meeting had a palpable air of crisis.

The debate over dinner conducted in private and without notetakers was the first chance for the 12 ministers to digest what the agenda coyly described as “recent developments”. They include a sharp fall in the euro, rising budget deficits, growing divergences in economic performance and political criticism of the European Central Bank's interest rate policy.

Added to that was the breaching of the eurozone's ultimate taboo calling into question the future of the single currency by Roberto Maroni, Italy's welfare minister. He had urged a temporary reintroduction of the lira, an idea later described as nonsense by Jean-Claude Juncker, Luxembourg prime minister and chairman of the 12-member eurogroup.

Commenting after almost five hours of talks, Mr Juncker said: “It's inconceivable a country could imagine dropping out of the euro.”

Against the gloomy backdrop the priority for ministers last night was to quell market uncertainty and to nip in the bud the burgeoning “what if” debate about the euro's long-term survival prospects.

Before the meeting, Joaquín Almunia, EU monetary affairs commissioner, told the Corriere della Sera newspaper: “The euro is an old-style marriage where divorce did not exist.” But the strains of the six-year-old monetary union are starting to show, with markets worrying about its long-term prospects: last week the euro fell to an eight-month low against the dollar.

The recent fall in the euro was characterised by insecurities linked to the European project, said Mr Juncker. “We are running the risk of euro exchange rates developing in such a way that they no longer reflect economic reality.”

Meanwhile budget deficits are rising across Europe, threatening to make a mockery of attempts to reimpose budgetary discipline through a more “flexible” stability and growth pact.

On Tuesday the European Commission will propose action against Italy for its repeated breaches of the pact's 3 per cent limit, which it disguised in recent years through statistical sleight of hand.

The deficits of France and Germany, perennial offenders, look set to stay above 3 per cent as the economic slowdown bites. Dominique de Villepin's new French government is putting an emphasis on job creation above budgetary stability.

Dutch anger over the way big countries ignored the stability pact was a factor in that country's No vote, as was a feeling that the currency was to blame for higher prices.

Ministers were also grappling last night with the strains imposed on the monetary union by economic divergences, with Italy sliding into recession while Spain powers ahead with predicted growth this year in excess of 3 per cent.

The divergences expose the pitfalls of the ECB's “one size fits all” interest rate policy, which has one overriding objective to keep inflation below 2 per cent.

By the end of the evening it was Michael Deppler, an IMF official, who was more upbeat about the eurozone's prospects than many of the ministers sitting around the table. Mr Almunia said an “optimistic” Mr Deppler believed “the conditions are ripe for an upturn in the second half of this year”.