* Period of faltering growth may follow crisis
* Falling prices not a worry
* Rifts loom over exit from fiscal stimulus
* Financial regulation, IMF, deficits on agenda
By Marcin Grajewski
BRUSSELS, July 3 (Reuters) - Euro zone finance ministers are
expected to voice fears on Monday that a recovery from the
economic crisis could be slow as the region's ability to
generate new wealth will shrink, diplomats said.
At a monthly meeting, the ministers are also likely to
conclude that the current fall in consumer prices should not
cause too much concern, and they will debate further when they
should start cutting their budget deficits swollen by fiscal
stimulus programmes.
"When discussing the economic situation, the ministers will
focus on the impact of the crisis on potential growth," one
diplomat said, referring to a term describing the highest
economic expansion sustainable over the long term.
European Union and euro zone officials believe that
potential growth in the 16-nation region, which was already low
before the crisis at 2 percent, will shrink while high
unemployment would persist for long.
"You can see that Europe will not have the growth potential
it had before the crisis," EU Monetary Affairs Commissioner
Joquin Almunia said this week.
But the ministers are likely to state that the worst is over
for the euro zone, although a modest recovery would start only
in 2010, with its scale also depending on whether the financial
system could be healed.
"The fact that we are moving away from the bottom now can
mean either that the economy is going upwards, or that maybe it
is a bounce and after that we could go down again and stay down
for a while," said a source involved in preparation of the
Eurogroup meeting.
"What happens in the banking system will be crucial -- if
credit channels are unblocked ..., then there could be gradual
improvement. There, general mood is cautiously positive," the
source added.
The source said that more and more euro zone and EU
governments, with the notable exception of Britain and France,
believed they should start to withdraw from their fiscal
stimulus programmes sooner rather later.
French plans to ignore the 2012 deadline of bringing its
deficit below the EU's cap of 3 percent of economic output,
imposed by EU finance ministers, are not at this stage expected
to be discussed.
The ministers are likely to side with the view of the
European Central Bank that the current period of negative
inflation would be brief and would not lead to harmful
deflation, or prolonged falls in consumer prices.
RELAX CAPITAL RULES?
They will also debate an overhaul of decision-making at the
International Monetary Fund, facing pressure from EU
institutions to create a single seat at the Fund for the bloc
and from emerging economies which want greater clout.
On Tuesday, when euro zone ministers are joined by their
counterparts from the whole 27-nation EU, Germany may propose
relaxing global rules on capital charges to ease writedown
pressures on banks holding toxic assets.
"Germany would have to make the case and we will see how the
discussion goes," said a senior diplomat from Sweden, whose
country holds the rotating presidency over the EU.
The German proposal would be made during a debate on new
regulations to discourage banks from pro-cyclical behaviour, or
minimise financial fluctuation throughout the economic cycle.
The ministers are also expected to give Poland and Latvia
until 2012 to cut their budget deficits below 3 percent of GDP.
Hungary, Lithuania and Romania will be told to go below the
ceiling in 2011.
(Additional reporting by Jan Strupczewski; editing by David
Stamp)
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