Bankers, policymakers say Europe's crisis not over

By Emma Thomasson and Alexander Smith

DAVOS, Switzerland | Sat Jan 26, 2013 12:15pm GMT

(Reuters) - International bankers and finance ministers warned on Saturday that Europe's crisis was not over even though the euro currency is now stabilised, it will take years to overcome economic malaise and mass unemployment in Europe.

After a private meeting of leading commercial bankers, government officials, central bankers and trade union officials, Swedish Finance Minister Anders Borg told Reuters: "There is a clear divide between the financial markets, who think a lot of this is fixed, and the people in the real economy and particularly from our side as the governments."

Unemployment in Europe would only fall from 11.8 to 11.7 percent this year, growth was stagnant, real wages were not rising in most countries and it would take countries such as Sweden and France years to reform their labour markets, he said.

"So it is very dangerous to declare that the crisis is over because that would undermine the crisis insight that we need to have among the companies, among the population, among the unions, to be able to go through this process," Borg said.

Sweden is not a member of the 17-nation euro zone and Borg has been among the strongest critics of the bloc's handling of its sovereign debt crisis since late 2009.

International Monetary Fund Managing Director Christine Lagarde and Deutsche Bank co-chief executive Anshu Jain, who co-chaired the closed-door meeting on the sidelines of the World Economic Forum in Davos, declined to speak to reporters.

Participants said the mood this year was far more relaxed than 12 months ago, when there was a sense of emergency about saving the single currency from break-up.

European Central Bank President Mario Draghi left Davos for home before the meeting and EU Economic and Monetary Affairs Commissioner Olli Rehn, who was in Davos, did not attend.

Lagarde said in a speech on Thursday it was vital for Europe, the United States and Japan to keep up the momentum for economic reform and put their public finances in order at an appropriate pace, without crushing growth.

Chinese central bank deputy governor Yi Gang, who attended the session, said he had voiced most concern about trade protectionism and the negative consequences of money-printing by the U.S., Japanese, British and other central banks.

"Protectionism is a big problem and also you see quantitative easing of developed economies is generating uncertainties in financial markets in terms of capital flow," he told Reuters in an interview.

"There is too much liquidity, a glut of global liquidity. Competitive devaluation is certainly one aspect of that. If everybody is QE or super QE and you want to depreciate, what currency do you depreciate against?"

One senior European commercial banker, who declined to be identified, said financial market optimism that the risk of a break-up of the euro was over had gotten ahead of reality.

"The crisis is not over and the notion that tail risk is gone is a dangerous one," the banker said.

The economic term "tail risk" refers to the possibility of an asset suddenly losing value due to a rare event.

Rehn told Reuters the conclusion of this year's Davos meetings about the euro was "no tail risk, growing confidence, no complacency, stay the course".

However, a larger-than-expected early repayment of cheap three-year loans by some euro zone banks to the European Central Bank on Friday fuelled sentiment that the worst of the single currency's debt crisis is now over and markets are stabilising.

Banks are expected to repay more than 130 billion euros of crisis loans to the European Central Bank next week in a sign that at least some parts of the financial system are returning to health.

The ECB made over 1 trillion euros in ultra-cheap three-year loans to banks in lending operations in December 2011 and February 2012, a process which ECB President Mario Draghi said had "avoided a major, major credit crunch".

(Writing by Paul Taylor; editing by Jason Neely)