European finance officials said the economic rebound remains tepid and warned that the mountain of debt piled up during the financial crisis may undermine private-sector banks.
Europe’s recovery is “fragile and uncertain” after growth spurted to 1 percent in the second quarter, the fastest pace in four years, finance ministers and central bankers said.
“The risks related to the sovereign-debt market could have a contagious effect on the banking sector,” the officials said in a statement today after a meeting in Brussels.
With European Central Bank President Jean-Claude Trichet trumpeting the need to cut budget deficits, the officials took the unusual step of calling on Ireland to raise taxes to plug a shortfall estimated at 32 percent of gross domestic product in 2010, the highest in euro history.
The warning of a potential debt shock undercut shares in European banks, paring gains in the Stoxx Europe 600 Index. The benchmark index was up 0.2 percent at 260.33 at 2:45 p.m. Brussels time after rising as high as 261.60 before the declaration.
Ireland, the euro region’s fastest-growing economy as recently as 2006, yesterday said it is taking control of Allied Irish Banks Plc and putting more money into the already nationalized Anglo Irish Bank Corp., raising the cost of stabilizing its financial system to as much as 50 billion euros ($68 billion).
Trichet told reporters of the urgency of “appropriate consolidation measures” across Europe, and European Union Economic and Monetary Affairs Commissioner Olli Rehn said Ireland’s days of offering some of Europe’s lowest taxes are at an end.
“Ireland will not continue as a low-tax country but it will rather become a normal-tax country in the European context,” Rehn said.
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