(Xinhua)
Updated: 2008-03-13 14:54

BRUSSELS -- Financial turmoil will top the agenda when leaders from the European Union (EU) member states gather here for their annual spring summit later this week.

Six months after European financial markets were victimized by the US sub-prime mortgage market crisis, EU leaders were tasked to find a way out of the persistent turbulence, which has become a major downside risk to the economy of the 27-nation bloc.

In summer 2007, European financial markets experienced a sudden and turbulent re-assessment of risk by investors, as the default rate on US sub-prime mortgage loans increased significantly.

Since the financial markets across the Atlantic are deeply intertwined and interdependent, sub-prime losses in the US quickly transmitted themselves via the securitization and credit derivative markets to many corners of Europe and the rest of the world.

Many European financial institutions, including some big names like UBS, Credit Suisse and Fortis, suffered huge losses resulting from mortgage-related investments.

It was estimated that world financial institutions have so far registered a total loss of US$215 billion related to the US sub-prime mortgage crisis. Europe was the second biggest victim after the US, with an estimated loss of US$78.5 billion.

However, the list of European banks afflicted by the crumbling US housing market is still growing. Such uncertainty made financial institutions reluctant to lend, resulting in credit squeeze, which forced the central banks to pump large quantities of liquidity to the banking sector.

The problems have spread to other segments of the financial system, such as commercial real estate securities, bond insurers and highly leveraged private equity loans, which banks continue holding, given the lack of outside investor interest for buying them.

"Six months since this turmoil started we still do not know how big the losses are," Charlie McCreevy, EU Commissioner for Internal Market and Services, said when addressing the Chartered Insurance Institute in London last week.

McCreevy warned little knowledge about the losses has undermined trust and confidence of investors and has caused serious disruption in certain markets, not least in the inter-bank markets.

"Without a clearer picture, restoring investor and business confidence will remain a significant challenge," he said.

Official figures showed confidence of European businesses and consumers has dropped below the long-term average, raising alarm to the momentum of investment and private consumption, the two growth engines.

In face of turmoil in financial markets, a sharp slowdown in the United States and soaring commodity prices, the European Commission last month revised down its economic forecast for the EU.

According to the commission, the EU economy will grow by 2 percent this year, slowing down from 2.9 percent in 2007.

Till now, the EU has not followed the United States to cut interest rate or take emergency measures like the US$168-billion economic stimulus plan.

The European Commission president Jose Manuel Barroso said last month he saw no current need for emergency measures since the circumstances in Europe are not the same as those in the United States.

"If we hasten into knee-jerk measures, we will end up undermining the strong fundamentals on which our measured confidence is based," Barroso said.

Barroso said Europe must strive to deliver growth, jobs, low inflation and low interest rates consistently over time under the Lisbon Growth and Jobs Strategy.

At the upcoming summit, EU leaders were scheduled to adopt the next three year cycle of the Lisbon strategy, ensuring that the process of reform and modernization will continue to deliver results in the EU, providing additional security against turbulence in international markets.

"Overall, the way for the EU to cope with the current shocks facing the global economy is to maintain sound and stable macro-economic policies supporting a balanced policy-mix and continue the course of structural reforms," the commission said in a document prepared for the summit.

"With the Lisbon strategy for growth and jobs, the EU has the right policies and instruments to help it weather the current storms and continue to deliver growth and jobs," it said.

In addition to reforms on the macro-economic level, EU leaders were also expected to endorse a series of lines of action in the financial sector.

EU finance ministers agreed in October 2007 a road map for reinforcing European and global financial regulation and supervision to fill the gaps revealed by recent financial turmoil in the wake of the US sub-prime crisis.

The roadmap is based on four key areas of work: improving transparency, valuation of financial products, strengthening prudential requirements and making markets function better.

The commission said it asked EU leaders at the summit to build on this road map and "go one step further" by confirming at head of state and government level the principles which will guide the EU internally and in international fora.

Proposed actions include improving information provided by credit ratings agencies, encouraging prompt and full disclosure of losses by financial institutions, improving early warning systems on financial stability and stepping up cooperation between regulatory authorities in the EU and globally.

Europe "can best retain the confidence of market operators and consumers alike by remaining vigilant and determined at times of added stress in the financial markets, working with international partners to identify weaknesses and to address these swiftly and effectively," the Commission said.