OECD warns eu­ro­zone on mas­sive debt

The Pak Banker - - International3 -

PARIS: Eu­ro­zone na­tions are en­joy­ing a sus­tained if muted re­cov­ery but need to adopt bit­ing sanc­tions to cor­rect eco­nomic im­bal­ances and must soon be­gin to cut their mas­sive debt loads, the OECD said on Mon­day.

The eu­ro­zone should also put in place a per­ma­nent cri­sis res­o­lu­tion mech­a­nism that would force na­tions to carry out re­forms to get aid, the OECD said, an is­sue Euro­pean lead­ers are ex­pected to tackle at a sum­mit later this week.

In its lat­est sur­vey of the 16 na­tions which share the euro, the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment said a "grad­ual and sus­tained re­cov­ery" is un­der­way in the but that "the pace of re­cov­ery is likely to be muted..."

Growth in the eu­ro­zone is likely to come in at 1.7 per­cent this year and in 2011 and then rise to 2.0 per­cent, ac­cord­ing to the OECD's lat­est fore­cast.

With jit­tery govern­ment debt mar­kets hav­ing forced both Greece and Ire­land to seek in­ter­na­tional bailouts this year, the OECD urged the eu­ro­zone states to quickly slash deficits and debt de­spite the slow pace of growth.

"Fis­cal con­sol­i­da­tion is the im­me­di­ate pri­or­ity to sta­bilise the pub­lic fi­nances and should be­gin by 2011 at the lat­est in all coun­tries."

The re­port said that while some coun­tries have in fact be­gun to cut their deficits, they should all adopt "cred­i­ble and de­tailed medium-term plans" as part of ef­forts to bet­ter man­age fis­cal pol­icy.

But elim­i­nat­ing deficits would nev­er­the­less leave eu­ro­zone coun­tries with high debt lev­els, leav­ing them in a poor po­si­tion to re­spond to fu­ture crises and the costs of their age­ing pop­u­la­tions, it noted.

"Pro­longed con­sol­i­da­tion is thus re­quired in most coun­tries to re­duce the debt-to-GDP ra­tio to pru­dent lev­els," said the OECD.

It also urged eu­ro­zone coun­tries to un­der­take re­forms of their pro­tected labour and prod­uct mar­kets, which would not only help ad­just­ment within the mon­e­tary union but would drive growth needed to re­duce debt lev­els.

"Struc­tural re­forms in labour and prod­uct mar­kets would fa­cil­i­tate eco­nomic ad­just­ment and will be par­tic­u­larly im­por­tant for achiev­ing vig­or­ous growth in com­ing years," said the re­port.

For the moment the OECD did not rec­om­mend that the Euro­pean Cen­tral Bank pull the plug on the mea­sures it has taken to sup­port the eu­ro­zone fi­nan­cial sys­tem.

"As soon as up­side risks to price sta­bil­ity in the medi­umterm emerge, mon­e­tary pol­icy stim­u­lus should be with­drawn," it said, adding that ex­cep­tional sup­port mea­sures should be ended as con­di­tions al­low.

Not­ing that the eu­ro­zone's cur­rent poli­cies were in­suf­fi­cient to pre­vent the im­bal­ances that led to the cur­rent sov­er­eign debt cri­sis, it called for a "re­in­forced Sta­bil­ity and Growth Pact (SGP)" to dis­ci­pline those who fail to bring their bud­gets and debt lev­els into line.

"Min­i­mum fis­cal stan­dards set by the SGP should be bet­ter en­forced: a range of sanc­tions, in­clud­ing fi­nan­cial penal­ties, should be ap­plied quasi-au­to­mat­i­cally un­der the SGP early in the sur­veil­lance process," said the OECD.

The orig­i­nal SGP con­tained sanc­tions but was gut­ted when the ma­jor eu­ro­zone coun­tries found they could not meet its con­di­tions. Euro­pean lead­ers have also sig­nalled they plan to tighten its pro­vi­sions.

The OECD also called for the eu­ro­zone to es­tab­lish a "cred­i­ble mech­a­nism for fis­cal cri­sis man­age­ment" that that makes re­ceiv­ing aid con­di­tional on un­der­tak­ing needed re­forms and ad­just­ments. -Afp

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