BRUSSELS (MNI) – The European Union must dispel concerns about the
fragility of its banking system and deliver on all its initiatives to
improve governance and regulation if investor confidence in the bloc is
to be restored, European Commissioner for Economic and Monetary Affairs
Olli Rehn said on Monday.

Worries about the fragile nature of the EU’s financial institutions
and about the high levels of debt and deficit in some of the bloc’s 27
member states have pressured the euro in recent months because investors
fear those factors could stymie growth and push the economy back into
recession.

“We must now indeed deliver at all fronts to reinforce confidence
in our economy,” Rehn said. “The key word is confidence.”

He said policymakers “need to maintain vigilance… since we are
certainly not out of the woods yet.”

But the Commissioner said he thought fears of a double-dip global
recession “are exaggerated,” asserting that the “underlying basic trend
in the real economy is clearly upwards.”

But he struck a more cautious note than perhaps he would have a few
months ago.

“In the spring, most of the new hard data suggested that a strong
recovery was under way, while financial market turbulence pointed to
substantial risks,” he said.

“More recently some real economy indicators have also softened,
particularly in the US, raising fears about a double dip,” Rehn added.

On the positive side, Europe’s export industries have capitalised
on the robust rebound in world trade, while unemployment is stabilizing
in the EU and an improvement in employment can be seen in some member
states, Rehn said.

“Recent data on industrial production from some hard-hit countries,
like Ireland and Spain, have also been encouraging,” he added.

On the downside, he mentioned financial market turbulence and the
health of the European banking sector, which has been in the spotlight
in recent weeks after some Spanish banks ran into difficulty.

“We need to remain vigilant, in particular with regard to the
financial markets,” Rehn said, adding that “doubts about the health of
the European banks need to be dispelled, which is why the [bank] stress
tests are so important.”

European finance ministers are set to debate at their meeting next
week how much information on the health of the banking system to reveal
and when to reveal it.

“The Commission is in favour of full transparency and advocated the
extension of bank stress tests and the publication of the results by the
end of July,” Rehn said. “This will help reduce uncertainty and restore
confidence.”

The best way to restore confidence is to deliver “on all fronts,”
Rehn said.

He said this included safeguarding financial stability, pursuing
growth-friendly austerity, advancing structural reforms and reinforcing
economic governance.

“We need stronger and better EU economic policy coordination. We
also need a more rigorous implementation of the rules of the EMU,” he
said, reiterating that monitoring of debt levels needs to take a more
central role.

He said the Commission’s idea for a European economic semester is a
“key tool” allowing “for prior coordination of economic policies before
final decisions on the budget for the following year are taken by member
states.”

That proposal by the EU’s executive arm is being opposed by some
member states on the grounds that their sovereignty will be infringed.
They say they won’t submit their budgets to the Commission until after
national parliaments have seen them. Rehn said the Commission proposes
to launch the European semester in January 2011 and that he expects EU
finance ministers to approve that initiative next week.

Overall, the EU’s executive arm wants to see “a wider range of
incentives and sanctions, which are used preventively and invoked at an
earlier stage,” Rehn said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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