Jun 23, 2009, 13:16 GMT
Brussels - Unless European Union governments act swiftly, the global financial crisis could cost them as much as 1.8 trillion euros (2.5 trillion dollars), or three times what they are already spending on the so-called 'real economy', according to European Commission figures out Tuesday.
Such a nightmare scenario is found in the commission's 2009 Report on Public Finances, whose risk analysis estimates 'the direct fiscal costs of the current crisis in the EU' at between 2.75 and 14 per cent of the bloc's gross domestic product (GDP).
The upper limit, which officials in Brussels revised down from the 16.5 per cent figure contained in the report, roughly translates into 1.8 trillion euros.
The range depends on how efficiently governments react to the crisis, and to what extent troubled banks use up the state guarantees that have been provided to them.
'Experience (from past financial crises) shows that the costs were lower when the banking crisis resolution strategy was implemented swiftly; was transparent and received broad political support,' the report said.
So far, EU member states have supported their banking sectors to the tune of about 13 per cent of GDP, and have already approved funds worth a further 31 per cent of GDP.
However, most of these measures are in the form of guarantees on bank liabilities, which do not affect public debt and deficits unless they are called upon, the report states.
As well as tackling the global financial crisis, EU governments are also having to address the bloc's worst recession in decades, pumping more than 600 billion euros in fiscal stimuli in their economies in 2009 and 2010.
This figure, which excludes measures to support banks, is largely made up of so-called 'automatic stabilizers' - such as spending on unemployment benefit, which tends to rise during economic downturns.
The largest fiscal stimulus as a percentage of GDP are currently being implemented in Spain, Austria, Finland, Britain, Germany and Sweden.
Such stimuli have produced ballooning budget deficits in most EU countries, prompting the commission to urge governments to reduce public spending as soon as the current crisis is over.
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