Steady as She Goes

Before the 13 ministers got down to business in the northern city of Porto, Portugal on Friday, they took a ride on a river cruiser up the Douro River. The message in this time of global credit upheavals seemed to be: Don't rock the boat. Europe is enjoying healthy growth and financial chiefs don't want the US sub-prime rate crisis or a muscle-bound euro to throw it off track.

"We are able to handle situations like (the current economic uncertainty)," Austrian Finance Minister Wilhelm Molterer told journalists as the 13 gathered for a working breakfast. "The European economy is robust and stable."

The reassuring words come after the euro hit a record high of $1.3927 on Thursday, reviving fears that an overly strong currency could hurt euro-zone exports by making them more expensive on international markets.

"We are following very closely all developments that can occur" on currency markets, said Luxembourg's Prime Minister Jean-Claude Juncker, who chaired the meeting.

Ministers were careful, however, not to overplay their concerns, fearful that hitting the panic button could unnerve financial markets reeling from a slew of bad economic news of late. Besides the strong euro, it appears that the international fall-out from the sub-prime crisis in the US, which was sparked by high-risk home mortgage lending, is continuing.

Impact, but not a huge one

Analysts say the creeping paralysis that the sub-prime crisis has caused has occurred not because banks have necessarily lost money as a consequence of the crisis, but because they are not sure if they have lost money or not. This type of uncertainty has made them wary about lending, exacerbating the problem.

On Friday, news broke that British mortgage lender Northern Rock had been given an emergency loan by the Bank of England to see it through a credit crunch.

Despite that, ministers from the 13 nations who have adopted the euro were careful to say that, while recent events will not help economic matters, the turbulence will not hurt them that much either.

"We think that the recent developments on the financial markets will have an impact, but a light impact, on the outlook for growth in 2007 toward the end of the year," said Juncker. "We believe that economic growth will remain sufficiently robust so that in 2008 we will not see a sharp downward revision."

The European Commission lowered its euro-zone growth forecasts slightly this week -- not because of the strong euro, but because of the credit crunch. It predicted that the bloc's economy would grow by 2.5 percent instead of 2.6 percent, which had been previously forecast.

"The fundamentals in the euro area and the European economies remain solid: profits in private companies continue to be high, balance sheets in the private sector are sound... and unemployment is at the lowest level in the past two decades," said Joaquin Almunia, the EU's economic affairs commissioner.

France rapped on knuckles

France came in for a scolding at Friday's meeting for not doing enough about its deficit and was urged to do more to bring it down.

"We think that the ambitions that France has shown do not entirely correspond to the level of our expectations," Juncker told journalists.

Although structural reforms undertaken by France "go in the right direction and should increase growth potential," Juncker said the ministers "believe that structural reforms and budget consolidation should go together."

Euro-zone finance chiefs had committed themselves in April in Berlin to balancing their budgets by 2010, but were warned by French President Nicolas Sarkozy that his reform plan meant France might not be in the black until 2012. He wants to jolt the French economy with a growth "shock" through a series of tax cuts. The move risks reversing the country's downward deficit trend.

France's Finance Minister Christine Lagarde acknowledged the dissatisfaction of her counterparts, but stressed that they had approved of Sarkozy's reform package.

If the French deficit starts rising again, it could soon break the EU rules requiring that fiscal shortfalls be kept to less than 3 percent.

"We will make every effort to reach the Berlin objectives in so far as the economic situation permits," Lagarde said.