Nov. 10 (Bloomberg) -- European Union finance ministers committed to start reining in budget deficits by 2011 at the latest even as they said economic stimulus remains necessary to nurture the recovery from the deepest slump in six decades.

“While it’s very important that economic policies stay expansionary, its also very important that we start to communicate and design the exit strategy,” said Swedish Finance Minister Anders Borg, whose government holds the EU’s rotating six-month presidency. “Public finances in Europe will deteriorate rapidly if we have an unchanged policy and if we don’t have eventually a strong fiscal restructuring.”

European governments have enacted billions of euros in measures aimed at reviving growth and saving jobs. The average budget shortfall in the euro region will balloon to a record 6.9 percent of gross domestic product next year with all 16 euro nations breaching the EU limit of 3 percent of GDP, the European Commission forecasts. The jobless rate is projected to reach 10.9 percent in 2011, the most since at least 1995.

“It is of particular importance to avoid that cyclical unemployment becomes entrenched,” the ministers said in a statement. “A decrease of long-term unemployment and an increase in participation rates, would have a positive effect on budgets as well as on potential output.” Ministers also said governments should “focus attention to sustainability-oriented strategies” as they address strains in public finances.

Deficit Overruns

The commission, the Brussels-based EU executive, tomorrow will issue reports assessing efforts by France, Spain, Ireland, Greece and the U.K., which isn’t in the euro area, to start to bring their deficits back into line with EU rules. Germany, Europe’s largest economy, and eight other countries will be given deadlines to correct their deficit overruns.

“Fiscal strategies should be differentiated according to the different positions of the member states,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said after attending the meeting of finance ministers in Brussels. Provided growth forecasts are realized, “the exit strategies from the fiscal point of view should start in 2011.”

The finance ministers last month agreed to wait until 2011 before cutting deficits to allow government spending to boost growth while the region recovers from the recession. Almunia affirmed that timeframe yesterday.

Risks to Growth

The euro-region economy will contract 4 percent this year before expanding 0.7 percent in 2010, according to the commission forecasts. European Central Bank President Jean- Claude Trichet said yesterday that while the recovery is taking hold a little faster than expected, risks to growth mean there is “no time for complacency.”

Group of 20 governments on Nov. 7 pledged to keep interest rates low and maintain record budget deficits until recoveries take hold. Trichet said central bankers agreed on the need for a “gradual and timely phasing out” of non-conventional policy measures without signaling that such a move was imminent.

EU ministers also discussed how to phase out support for the banking industry. EU governments have provided 920 billion euros ($1.4 trillion) in guarantees for the financial-services industry, and officials should begin making the national plans “less attractive” by bringing the pricing of aid “closer to market conditions,” according to a draft report by EU regulators discussed at today’s meeting.

Bank-Support Programs

While some countries supported developing “timing coordination” for the withdrawal of bank-support programs, others highlighted the “very large degree of fragility in the financial system,” said Sweden’s Borg, who led today’s meeting. “We will eventually have to go back to more normal conditions” in terms of guarantees, capital injections and bad-asset plans, he said, adding that “a need for further discussions” exists.

The ministers agreed on a “general approach” for banks to strengthen disclosure and capital requirements, according to a statement. At the same time, banks must prevent “remuneration policies that generate unacceptable levels of risk,” they said.

The U.K. last week gave more support to Royal Bank of Scotland Group Plc, making it the most expensive bank bailout ever. Barclays Plc, the U.K.’s second-biggest bank, said today that third-quarter earnings fell 54 percent as impairment charges increased.

The ministers also agreed to set new solvency rules for insurers under the Solvency II directive, which is designed to align European insurers’ capital requirements with the amount of risk they take on. And they reached agreement on a reform of excise duties on cigarettes and other tobacco products.

To contact the reporters on this story: Jennifer Ryan in Brussels at jryan13@bloomberg.net; Agnes Lovasz in Brussels at alovasz@bloomberg.net.

Last Updated: November 10, 2009 10:45 EST