The collapse of the U.S. subprime market has put a damper on expected European economic growth. European Commissioner for Monetary Affairs Joaquin Almunia says there’s an environment of increased uncertainty: “The Euro area and the European economies are solid but the impact of the recent turmoil on the financial markets that indeed has created increased uncertainty and tighter financing conditions.”
The European Commission has shaved its growth rate estimate for the Euro-area economy. In May it forecast a growth of two point six percent. But now it sees the economy of the thirteen nations that use the Euro expanding by two point five percent this year. The Commission joins organizations including the European Central Bank and the International Monetary Fund in becoming more pessimistic on the outlook for economic growth in the Euro Zone.
ECB President Jean Claude Trichet says more information is needed before drawing conclusions on interest rates: “We had seen a distinct possibility of the ongoing deterioration of the credit worthiness of borrowers in the US subprime mortgage market could be a trigger for more broad based market correction.”
The crisis in the U.S. mortgage market made banks reluctant to lend, leading to cash shortages. The Commission says the turmoil has clearly tilted the balance of risks to the downside and points to a somewhat reduced growth momentum in 2008.