Euro zone needs stricter financial, fiscal discipline to dilute risks: OECD

Posted on Dec 14, 2010 in AllEconomic News
The euro zone has emerged from the global depression as activities are picking up, but fraught debt crisis and widening imbalance in the area threaten the fragile recovery, the Paris-based Organization for Economic Cooperation and Development said on Monday.

The Euro Area Economic Surveys underlined the intra-area imbalance between surplus countries, led by Germany, and Greece, Ireland, Portugal and Spain with lax fiscal conditions, calling for stricter financial and fiscal discipline at European level.

The OECD in a report reiterated the importance to conform with the EU Stability and Growth Pact (SGP), which fixed a national debt lower than 60 percent of GDP and annual deficit no higher than 3 percent of GDP.

The report even proposed sanction measures “range from intrusive surveillance and warnings by the Council to financial sanctions” to punish those who violate the SGP.

“Monetary penalties should include the requirement that funds be posted to an interest-bearing account until corrective policies have been implemented,” the report added.

Meanwhile, the organization stressed the necessity to enhance financial governance at the European level, suggesting “effective macro-prudential supervision” and cross-border regulation on banks.

The OECD report said the European supervisory network was decentralized, which “proved problematic and complicated efficient resolution” in carrying out rescue methods for debt-ridden peers.

As a key role of financial instruments, banking system in a more integrated European market needs to be more efficient and stable, the report added, stressing the importance of the 2010 bank stress test.

“Stress tests should become a regular exercise and be further harmonized,” the report said.

The European Council has revised up the economic growth of euro zone in 2010 to 1.7 percent on increased export and investment in second quarter, but forecast slower expansion of 1.5 percent in 2011 mainly for debt crisis concerns.

Euro zone needs stricter financial, fiscal discipline to dilute risks: OECD – People’s Daily Online.