European recession will worsen, says economist

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The worst of the recession is yet to come, European finance chiefs warned today.

And there is still "something rotten" in the banking system in Europe, despite the spate of recent state bailouts.

Erik Berglof, chief economist at the European Bank for Reconstruction and Development, and EU Competition Commissioner Neelie Kroes were speaking at the Forbes CEO Forum in Gleneagles today.

"I don't think the worst is behind us," Mr Berglof said.

"We've not seen everything yet."

There may be a bit of upturn in the economy before a slow recovery sets in, he added.

Ms Kroes said: "There's still not the trust in the banking world.

"It's a major thing that banks are lending, otherwise the economy will not function.

"There's still enough bankers who are doing this because they realise there is still something rotten in the closet."

Mr Berglof called for a US-style approach to publicise the bad debts in the system, during a question and answer session with Steve Forbes, chairman and editor of Forbes magazine.

"There's a sense that we don't know yet what's in our banking system," Mr Berglof said.

"There's a need not only to find out but also to make public like you did in the United States.

"That was a model for how to do it and it certainly helped to stabilise the system.

"We need the same thing in Europe now and we need to make it public."

Ms Kroes told delegates that she recently held a series of meetings with representatives of the banking sector, who were blaming each other for the problems.

"Quite a number of them were denying the situation in their own institutions," she said.

Banks have to start lending money to allow smaller business to operate, Ms Kroes said.

"They need loans - nothing more or nothing less.

"We're not yet at the end of the result of the consequences of this recession."

The crisis in the car industry, including firms such as General Motors going into administration, is down to mismanagement, Ms Kroes said.

She said: "There was over-capacity. There was more than 25% over-capacity in the production of cars before the crisis - the consequences of this are now on us."