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By Natsuko Waki and Nigel Davies
LONDON, Nov 16 (Reuters) - Turmoil on financial markets may have further to run and the European Union is discussing how to tackle future turbulence, Economic and Monetary Affairs Commissioner Joaquin Almunia said on Friday.
Almunia, speaking at an event in London, said the market problems did not result from regulatory issues in the European Union but mispricing of risk.
"The mispricing of risks has led to negative consequences in markets, all of which may not have been seen," he said.
Almunia said the EU was still evaluating the situation, adding: "We have started discussions on how to respond to abort the negative consequences that have not been accounted for."
"Actions are being discussed on a European and political level looking at the functioning of financial business, ratings agencies and institutions concerned with the supervision of markets."
The credit crunch began in earnest in August as the fallout in the U.S. subprime mortgage triggered concerns about the health of financial firms. Worries that banks might have to announce big write-downs from their exposure to credit markets have weighed on investor sentiment.
The credit crunch has also fanned concerns that the U.S. economy might take a beating. Expectations that the Federal Reserve would cut U.S. interest rates again in December to limit economic damage have weighed on the dollar, which hit a record low against the euro earlier this month.
Asked about a stronger euro, Almunia repeated the message given by Group of Seven finance chiefs in October, saying: "Exchange rates should reflect economic fundamentals and all sharp movements in exchange rates are not welcome."
"We need to avoid sharp movements in exchange rates because this creates problems for all of us."
He also noted Washington favoured the strong dollar.
"I always listen very attentively to statements by (U.S.) Treasury Secretary (Henry) Paulson and he and the U.S. authorities are in favour of the strong dollar."
Almunia also said Poland and the Czech Republic are on track to meet in a couple of years the criteria for entering the euro zone, while the assessment of whether Slovakia could join in 2009 would take place in May.
"Poland and the Czech Republic can easily comply with the criteria in the next couple of years," he said. "Slovakia wants to join in 2009 and we will consider its progress next May ... So far, they can comply."
Almunia said the Baltic states would like to adopt the euro, but added: "They have the problem of inflation. Their economies have overheated and they should reduce the temperature."
Almunia said last week that Slovakia was on course to meet the budget deficit target needed for euro entry but would have to show it can keep the lid on mounting inflationary pressures.
(Reporting by Natsuko Waki and Nigel Davies; editing by David Stamp)
((natsuko.waki@reuters.com, +44 207 542 6721, Reuters Messaging: natsuko.waki.reuters.com@reuters.net))
Keywords: ECONOMY ALMUNIA/
